Leveraging informal lending mechanisms to facilitate technology transfer and microenterprise in...

Leveraging informal lending mechanisms to facilitatetechnology transfer and microenterprise in developingcountries

Kory Hansen a, b, *, Jin Ju Kim a, b, Stephen Suffian a, c, Khanjan Mehta a

a Humanitarian Engineering and Social Entrepreneurship (HESE) Program, The Pennsylvania State University, Pennsylvaniab School of International Affairs, The Pennsylvania State University, Pennsylvaniac Sustainable Engineering Program, Villanova University, Pennsylvania

a r t i c l e i n f o

Article history:Received 30 March 2014Received in revised form 3 December 2014Accepted 5 December 2014Available online xxxx

Keywords:Social capitalInformal lendingTechnology transferROSCAMicro enterprise

a b s t r a c t

This article discusses how Rotating Savings and Credit Associations (ROSCAs or merry-go-rounds) can concurrently overcome four challenges faced by small enterprises in devel-oping communities: access to financial capital, technology transfer, vertical and lateralknowledge transfer, and reliable market linkages. Based on primary data from Kenya, threemodels of partnership between ROSCAs and diverse external organizations are presentedand compared against each other. These approaches are designed to help ROSCA groupsengage in small enterprises, while creating business opportunities for agricultural tech-nology manufacturers and the formal banking industry. The ultimate purpose of suchcollaborations is to improve rural livelihoods, strengthen food value chains, and foster foodsecurity.

© 2014 Elsevier Ltd. All rights reserved.

1. Introduction

Reflecting similar challenges in many developingcountries, the unemployment rate for Kenya in 2012 wasestimated at 40%, which was five-times the global averageat the time [19]. In an attempt to alleviate chronic unem-ployment and foster economic growth, several govern-mental and non-profit organizations have emerged toenable and empower micro-enterprises. Their efforts haveoffered Kenyan small and medium enterprises increasedaccess to capital and professional business management

advice [9,20]. Micro-enterprises now constitute a signifi-cant part of the national economy, accounting for an esti-mated 18% of GDP and the employment of 3.2 millionpeople [16]. Access to financial capital is one of the biggestchallenges facing entrepreneurs striving to start theirbusinesses. Despite the increased interest in providingenterprises with access to capital, the formal bankingsector in Kenya is deficient in this role. Although the formalbanking industry in Kenya is the most developed in Sub-Saharan Africa, as of 2009 70% of adult Kenyans reportnot having a bank account [18]. Cultural customs, physicaldistance, unattainable minimum deposits, high adminis-trative costs, recurring fees, and complicated bankingprocesses stymie efforts at expanding financial services tothe unbanked.

The formal banking sector, including traditional banksand savings and credit cooperatives (SACCOs), meet the

* Corresponding author. School of International Affairs, The Pennsyl-vania State University, Pennsylvania.

E-mail addresses: [email protected] (K. Hansen), [email protected] (J.J. Kim), [email protected] (S. Suffian), [email protected] (K. Mehta).

Contents lists available at ScienceDirect

Technology in Society

journal homepage: www.elsevier .com/locate/ techsoc

http://dx.doi.org/10.1016/j.techsoc.2014.12.0010160-791X/© 2014 Elsevier Ltd. All rights reserved.

Technology in Society xxx (2014) 1e11

Please cite this article in press as: Hansen K, et al., Leveraging informal lending mechanisms to facilitate technology transfer andmicroenterprise in developing countries, Technology in Society (2014), http://dx.doi.org/10.1016/j.techsoc.2014.12.001

needs of small business owners trying to expand theirbusinesses, but they do not typically lend money to un-proven entrepreneurs interested in starting new micro-enterprises [6]. The lack of credit history and collateralare the primary barriers for these entrepreneurs [3]. Due tothe accessibility problems in the formal financial sector,entrepreneurs rely on the localized and trust-basedinformal financial systems. Over 50% of Kenyan adults areactive in at least one informal financial group, with 35% ofthe population citing such groups as their only access tofinancial services [12]. The informal financial sector iscomprised of several different types of lending groups.

The first place many entrepreneurs turn for start-upcapital is their network of friends and family. Unfortu-nately, this is rarely sufficient in developing communitiesas friends and family are often also in financially vulnerablepositions. Next, entrepreneurs often turn to rotating oraccumulating savings and credit associations. RotatingSavings and Credit Associations (ROSCAs) are informalgroups comprised of community members that contributea set amount of money on a weekly or monthly basis. Themembers take turns receiving the total funds collected. Thisrotating savings structure gives members access to largesums of money, in less time than it would have taken themto save on their own. Accumulating Savings and CreditAssociations (ASCAs) are similar to ROSCAs with theexception that these groups charge interest to the bor-rowers. This accumulation of interest allows the pot togrow, giving members access to ever-increasing loanamounts [5].

A previously conducted study about access to capital inrural Kenya reported that none of the surveyed entrepre-neurs borrowed money from micro-finance institutions(MFIs) [11], ROSCAs and ASCAs were the most prominentsources of funding for individuals in these rural commu-nities. The trust-based relationships in the agriculturalcommunities are further strengthened by the ROSCAs andASCAs. The growth and success of rural agricultural enter-prises is pivotal in developing countries like Kenya whereover 80% of the economy is dependent on agriculture andsmall-scale farmers are responsible for a majority of thecrops produced [1]. Of the estimated 1.3 billion tons of foodwasted each year, most of the loss is due to post-harvestinefficiencies in production, processing and trans-portation [14]. The Food and Agriculture Organization(FAO) of the United Nations posits that these challenges canbe addressed through the optimization of land use pro-ductivity in terms of labor, crop yield, water conservation,and waste reduction [23].

Appropriately designed agricultural technologies canhelp farmers and agro-enterprises increase yields andmoreefficiently process, store and transport food products.While the largest barrier to the integration of technologiesin the food value chains (FVCs) is access to capital, there areother challenges too. A second barrier is the lack ofcontinual educational support to facilitate the transfer ofknowledge from the experts to the farmers, and thenfacilitate knowledge transfer amongst the farmers them-selves. The diverse players in the formal and informallending circles, including MFIs, SACCOs and governmentaloutreach programs, provide a level of knowledge transfer

to the farmers [17,25]. While this knowledge transfertypically happens in the early stages of introduction of thetechnology, follow-on support related to maintenance,troubleshooting and business management is not easilyaccessible. The initial knowledge transfer typically needs tobe between the experts and the farmers while lateralknowledge flow amongst the farmers and other involvedactors are crucial during the operational phases. This peer-to-peer knowledge transfer necessitates the establishmentof trust amongst all the stakeholders.

A related barrier to this transfer of knowledge is thelevel of complexity within the actual product design, alsoknown as technology transfer. Difficulties with the transferof a certain technology must be addressed by the manu-facturer because the viability of the manufacturer's busi-ness depends on it. Design components that can dictate theimpact of this barrier include product mobility, requiredtechnical literacy, and availability of replacement parts.This focus on designing appropriate technologies has beenwell studied as vital for sustainable technology prolifera-tion [31]. The focus on human-centric approaches, incor-poration of indigenous knowledge, and cooperative designhave been shown to be important aspects in ensuring that atechnology is contextually appropriate [32]. A strongernetwork of knowledge transfer can make it easier forfarmers to gain the necessary technical expertise andsupplies necessary for product use in the longer term. Inthe agricultural sector, several studies have shown thatfarmers prefer receiving information from people theyknow, trust and who are familiar with the local farmingconditions [33]. Trust is the most important factor indeciding whom towork with and whom to ask for practicaladvice. Small farmers generally learn about best practicesand exchange knowledge only with peers in their imme-diate social networks [31]. Furthermore, farmers often relyon these networks to access agricultural markets. Theyidentify trustworthy brokers, work with market retailers,and sometimes combine their produce with other farmersin order to share transportation costs. However, value-added products such as dried fruits or processed dairymay be difficult to sell locally and require more establishedinstitutions such as marketing agencies or corporate en-tities to access profitable markets [27,28]. The ability to findthese market linkages is the fourth major barrier forsmallholder farmers when establishing agriculturalenterprises.

Research on agri-business in East Africa indicates thatfarmers and traders value trustworthiness and personalrelationships over price and profits [21]. ROSCAs facilitatethe creation of multi-stranded relationships and trustednetworks amongst farmers and other actors in FVCs. Suchcommunity-based peer groups allow the members accessto capital, technology transfer, knowledge transfer, andfacilitate market linkages to grow their enterprises. Weposit that these four factors are the basic conditions thatmust be met by any entrepreneur establishing a business ina developing nation in order to facilitate sustainablepoverty reduction.

This article discusses the potential of informal finan-cial groups such as ROSCAs in addressing the four bar-riers to technology-based agricultural microenterprises:

K. Hansen et al. / Technology in Society xxx (2014) 1e112


access to capital, technology transfer, knowledge transferand establishing market linkages. Technology entrepre-neurs trying to integrate their innovative technologiesinto FVCs can benefit from working with communitiesthat have a strong culture of participation in informallending groups. This article is also of interest to devel-opment organizations, SACCOs, and other entitiesengaged in poverty alleviation projects by helpingfarmers and other FVC actors improve their livelihoods.This article begins by identifying various actors related toformal and informal financial sectors of Kenya. Specif-ically, we examine the strengths and weaknesses of eachone as a source of start-up capital for agricultural micro-enterprises. Inefficiencies in FVCs and the opportunitiesand barriers to integrating appropriate technologies arediscussed. Finally, based on first-hand experience devel-oping innovative agricultural technologies and interact-ing with ROSCAs in Central Kenya, we present andcompare three models of partnership between ROSCAsand diverse external organizations.

1.1. Overview of diverse formal and informal sources of accessto capital

The Central Bank of Kenya identifies over 100 orga-nizations engaged in various forms of micro lendingwithin the borders of that country alone [24]. These or-ganizations provide financial services such as loans,money transfer, and insurance for low-income house-holds [4]. Recent government reforms in some devel-oping nations raise concerns that MFIs will ultimatelyserve as commercial banks, as these new initiativesrequire increased loan security. For instance, many MFIsonly offer group-guaranteed loans to individuals, effec-tively making every group member a co-signor and liablein the event of default. Additionally, loans require highinterest and repayment usually begins almost immedi-ately after the loan is received. This lack of a grace periodoften prevents would-be entrepreneurs from approach-ing MFIs as a source for initial funding [17]. The manyterms and conditions that MFIs imposed on borrowersoften make their loans inaccessible to many small-scaleentrepreneurs.

Despite potentially burdensome loans, however, anumber of MFIs do successfully help micro-entrepreneursby providing business-training opportunities otherwisedifficult to access to rural Kenyans. Karlan & Valdiviaconducted a two-year-study on the impact of trainingprovided by MFIs and discovered that borrowers whoreceived training made more profit than those who didnot [34]. Moreover, the training programs also give micro-entrepreneurs access to networking opportunities and asupportive environment [35]. However, the training islimited to business knowledge, marketing strategies, useof profits, and record keeping, and does not addressknowledge related to the use of the agricultural technol-ogy. SACCOs are common member-owned financial in-stitutions. Members are directly involved in the decision-making processes of SACCOs, electing directors to handleday-to-day operations. SACCOs encourage money saving,provide credit services at reasonable rates, and offer

various other financial services, while simultaneouslypromoting networking opportunities among members.SACCOs provide many services including selling shares,offering credit facilities and managing savings accounts.Non-members are eligible for savings accounts and oftenmake up a large portion of deposit holders. However,taking loans is limited to SACCO members, and newmembers must wait about six months before applying fora loan [6].

SACCOs also engage in active partnership building, un-like other organizations in the formal financial sector. EachSACCO has employees specifically responsible for facili-tating mutually beneficial partnerships between theirmembers and outside agencies, corporations and manu-facturers. These “business development” employees spendmuch of their time in the agricultural communities. Theyare engaged in forging relationships and capacity-buildingactivities so that these groups will some day mature andengage in larger businesses that will require them to takeloans from the SACCOs. Organizations likeMFIs and SACCOsprovide many valuable financial, networking and educa-tional opportunities to eligible customers, particularlythose with established credit histories and collateral.Consequently, entrepreneurs turn to a smorgasbord ofinformal lending mechanisms to pursue their entrepre-neurial dreams and bolster their livelihoods. Entrepreneurstypically begin by borrowing from friends and relatives.This traditional method offers both money and emotionaland educational support, but also entails high risk anddepends on a limited pool of potentially financiallyvulnerable people.

Informal groups such as ROSCAs and ASCAs have beguncollective saving and lending based on trust, social norms,and local networking [3]. ROSCAs are incredibly popular inKenya and can be found in almost every country with adifferent name [6]. Some regions of Kenya report thatalmost 74% of households participate in ROSCAs [2].Members generally come from the same geographic areaand often share similar occupations and income levels,meaning that peer-pressure and cooperation often enhancea borrower's willingness to participate. Members benefitfrom sharing both money and business experience, whichin turn creates social capital based on trust. This socialcapital becomes a motivation for ROSCA groups spreadthroughout a community [5]. Over time, some of the ROS-CAs evolve into ASCAs in order to save and lend moremoney to its membership. In ASCAs, members contributeinto a savings account, and loans can last for up to a year.However, interest rates are relatively high for this type oflending, around 5e10%. These higher rates help the ASCAlending pot grow more quickly, increasing lending capacityand potentially resulting in profits that members split atthe end of each year [5]. ASCAs share ROSCAs reliance on,and benefit from, trust-based networking and knowledgetransfer [6,18].

It is important to note that informal lending mecha-nisms like ROSCAs and ASCAs are growing more formal.According to interviews conducted with ROSCA groups inKenya, while participants had formed the groups via verbalcommitment without outside obligation, each ROSCAgroup is required to register with the local governmental

K. Hansen et al. / Technology in Society xxx (2014) 1e11 3


authorities in order to legitimize and get administrativehelp if necessary. ROSCA and ASCA groups now recordminutes in every meeting, and they receive a stamp forcommunicating progress to the local government office.This legitimizing process further supports the trust neces-sary for enabling low-interest loans, while simultaneouslyfacilitating partnerships between ROSCAs/ASCAs and NGOor governmental organizations [11]. As these informallending mechanisms gain legitimacy and become moreformal, how can they be leveraged for strengthening FVCsand alleviating poverty? The next section discusses FVCsand the potential of agricultural technologies in makingthemmore efficient. These approaches are designed to helpROSCA groups engage in small enterprises, while creatingbusiness opportunities for agricultural technology manu-facturers and the formal banking industry. The ultimatepurpose of such collaborations is to improve rural econo-mies, strengthen food value chains, and foster foodsecurity.

2. Food value chains and agricultural technologies

Small-scale farming constitutes over 90% of food pro-duction on the African continent [22]. In Kenya, small-scale farming contributes about 75% of the total value ofagricultural output and 51% of the total employment inagriculture [1]. The agricultural industry in general ac-counts for nearly a quarter of Kenyan GDP, more than two-thirds of the labor force, and almost 70% of the exportearnings, in addition to generating the bulk of domesti-cally consumed food [30]. Food security is a growingconcern in Kenya, and across the globe, as populationscontinue to rise and demand for resources increase. The2007e2008 riots over food prices in thirty countriesacross the developing world, most of them in Sub-SaharanAfrica, bear testimony to the enormity and scope of thechallenge.

For the purposes of this paper we utilize the UnitedStates Agency for International Development (USAID)

definition of food security as ‘when all people at all timeshave both physical and economic access to sufficient foodto meet their dietary needs for a productive and healthylife’ [29]. Unfortunately, 30e35% of the population in sub-Saharan Africa is still malnourished, an even larger pro-portion than forty years ago [22]. In Kenya in particular,food security is impeded at several stages of the food valuechain (FVC). First, 72% of the total land area of Kenya isclassified as either arid or semi-arid, making it unsuitablefor agricultural purposes [15]. Second, food waste due toearly harvesting, improper handling and processing, andinadequate storage and transportation infrastructure is amajor issuednearly one-third of food intended for humanconsumption is wasted each year, and almost 40% of thatwaste in developing nations is the result of these FVC fac-tors [14].

Fig. 1 shows various stages along the FVC whereappropriate technologies can enhance food security. Theproducts indicated are examples of technologies capableof creating a more efficient agricultural industry, which inturn would enhance socio-economic growth in theregion.

The dissemination and adoption of agricultural tech-nologies that improve the processes comprising FVCs canfoster food security and strengthen FVCs while improvingthe lives and livelihoods of the actors involved in thesefood systems. The FVC processes can be divided into thefollowing phases: agricultural production, processing,storage, marketing, distribution and consumption.Numerous businesses, non-profit organizations and aca-demic programs have emerged to develop innovativetechnologies that both improve the livelihoods of farmersand promote food security [27,28]. Yet these entities faceenormous obstacles as they attempt to disseminate theirproducts to the people who need them most [36].Although these technologies exist, they are out of reachfor many of the small-scale farmers operating across thenation. For example, greenhouses and drip irrigationsystems are proven methods to boost crop yields and the

Fig. 1. Agricultural technologies across food value chains.



number of growing cycles per year, but are too expensivefor most smallholder farmers and microenterprises.Agro-enterprises need access to capital, access to tech-nology, necessary operating knowledge and marketlinkages to make the most of these technologies. As dis-cussed earlier, ROSCAs and ASCAs (and to some extentMFIs and SACCOs) help overcome the issue that 88% ofKenyan banks are averse to providing loans to start-upmicro-entrepreneurs who characteristically lack credithistory, collateral, and financial records [7]. However, theknowledge transfer facilitated by these organizationsdoes not meet the farmer's technology support needs andthey continue using ineffective manual farming practices[8,26].

Consider the situation of “Jack”, a small-scale farmerwho owns two hectares of land in Kenya. On this land, hemust produce enough food to feed his family, which in-cludes his wife, three children, his sister-in-law (an HIV/AIDS widow) and her two children. In addition to thenutritional needs of these eight people, Jack must also haveenough produce to sell in the marketplace so as to pay forhousehold expenses such as clothing and school fees. Jack'swife and sister-in-law also have jobs to help meet thefamily's financial burden, but the additional income isminimal. Jack knows the land could bemore productive butdoes not have the knowledge or technology necessary toachieve this. He has approached several formal financialinstitutions seeking a small loan so that he can purchase anaffordable greenhouse, but he has been turned away fromthem each time. Furthermore, Jack does not have theknowledge required to fully utilize the greenhouse. Jack'sfamily, like countless others in Kenya, is suffering. Inaddition, the technology manufacturers (those that wouldhave sold him a greenhouse) also suffer from the smalleravailable market. For instance, Kenya already has com-panies that can provide affordable greenhouses to ruralareas and have a vested interest in ensuring proper use, butthey are unable to reach these customers. Lacking access tofinancial capital through the formal sector so far, Jack soonrealizes that other avenues must be taken for collateral. Asis the case for many people living and working in devel-oping nations across the globe, Jack is actively involved inseveral ROSCAs.

Utilizing the collective savings function of this socialgroup grants Jack secure access to the financial capital thathe needs to acquire the greenhouse. He buys a greenhouseand begins benefiting from the increased productivity ofhis land. Since the greenhouse manufacturers have notonly sold him the equipment but have also providedtechnical knowledge regarding the set-up, care andmaintenance of the greenhouse, Jack is almost on the roadto long-term success. However, Jack has not been providedpractical knowledge of what crops are best to grow in hisgreenhouse. From previous farming experiences on hissmall land, Jack has some of this knowledge. While thegreenhouse has great potential to improve the wealth ofJack's family, it also has the potential to create burdens forthe family if it is not operated correctly. If the greenhousegoes into disrepair or becomes overridden by pests, Jackwould actually be worse off than he was before becomingthe proud owner of a greenhouse. The greenhouse itself is

actually taking up space on Jack's land that could other-wise be used for crops. Therefore it is paramount that hehas both the technical as well as the practical localknowledge necessary to keep his greenhouse functioningeffectively.

The technical knowledge has come from the green-house manufacturers and national agricultural researchlabs. To acquire the practical local knowledge he lacks,Jack can once again rely upon the social capital he hasbuilt up through his ROSCA membership. The ROSCAgroup that provided the funding to buy the greenhousealso share their collective knowledge with Jack andassure his greenhouse functions as intended. While someof the obstacles preventing Jack's family from realizinglong-term success at poverty reduction have beenconquered, one still remains. Increasing productivity andgrowing more crops on his land is wonderful but Jackmust also sell these goods before real financial gain isrealized. In order to do this he must have access to amarketplace. He also needs the knowledge of how tostore and transport his items in the safest manner. Againthe other members of his ROSCA can supply any knowl-edge Jack is missing in these regard. More importantly, asthe ROSCA members start owning and operating theirown greenhouses, they can utilize economies of scale.They can now afford transportation to get their collectiveproduce to market and have the upper hand in negoti-ating a fair price for their goods. In this instance, Jackfaces and overcomes four issues (access to financialcapital, technology transfer, knowledge transfer andmarket linkages) hindering the success of the micro-enterprise he seeks to establish, by utilizing the socialcapital he has built up within the ROSCA to which hebelongs. Jack's success as a greenhouse farmer inspireshis trusted friends, family and neighbors and provides acompelling local example of the efficacy of the technol-ogy. These individuals can start their own venture orinitiate a group project on a larger scale.

Technology manufacturers looking to disseminatetheir products in rural areas can benefit from partneringwith ROSCA groups. First, ROSCAs provide access to thecapital they need to purchase value-add technologies. Insuch trust-based cultures with oral traditions, word-of-mouth marketing amongst peers is a common andextremely effective tool for reaching customers. Finally,after purchase, ROSCAs serve as forums for the “Jacks” ofthe developing world to form a user community and ac-cess the operational local knowledge necessary to makethe most of such technologies. By providing an avenue foraccessing capital and transferring knowledge from peer-to-peer, ROSCAs can become valuable partner organiza-tions to technology manufacturers. Such a partnershipcould lead to increased sales for their products as well asbrand loyalty and positive reputation throughout thecommunity.

The next section of this paper presents several modelsdemonstrating specific ways ROSCA groups can benefitfrom strategic partnerships like these in order to enhancetheir success with transferring knowledge and technology,providing access to capital and providing (or strength-ening) market linkages. Before the effectiveness of these



models can be ascertained, it is critical to understand in-depth the way these groups operate.

3. Potential models for building user communitieswith ROSCA partnerships

3.1. Research methodology used to create the models

In May 2012, Focus Group Discussions (FGDs) wereconducted with members of thirteen distinct ROSCAgroups in and around the town of Nyeri in the centralhighlands region of Kenya. The goal was to better under-stand how ROSCAs form, operate and investigate thefeasibility of partnerships between ROSCAs and technol-ogy entrepreneurs. For the purpose of these modelstechnology entrepreneurs are understood to be in-novators, manufacturers, sellers and their agents of aproduct intended to improve the quality of life and reducepoverty for residents of developing nations. Meetingswere conducted in multiple languages: English, Kiswahiliand Kikuyu. Staff from the Taifa Sacco, a local financialservices organization aimed at helping informal bor-rowers achieve financial stability, facilitated all of theFGDs. Their pre-existing relationship with the ROSCAgroups allowed members to trust us and discuss theiractivities and aspirations in detail.

All of the groups were created independently andpossessed unique membership guidelines. At the sametime, each group shared similar hopes and aspirations tosee the financial livelihoods of its members improve, andthereby increase the economic activity of their community.Membership of several groups comprised mainly of sub-sistence farmers. One group only allowed members witheither physical or mental disabilities and other groupsaligned membership to those who affected by other healthconcerns such as HIV/AIDS. At the time most groups wereable to address only the short-term financial needs of theirmembers and they expressed interest in engaging in busi-ness activities that would satisfy their long-term needs andescape the poverty trap.

The specific interest in agricultural technologies waseasy to validate in the rural areas with largely agrarianlifestyles. The insights from the FGDs with ROSCA mem-bers and the larger community groups led to the creationof the three models that are presented and compared inthis section. Each of these three models present a methodto simultaneously overcome the four barriers that preventlong-term success for micro-enterprises in developingnations; lack of access to capital, lack of access to tech-nology, lack of expert and peer-to-peer knowledge trans-fer, and lack of stable market linkages. These modelsemerged from participant responses, facts and observa-tions of multiple ROSCA groups and were validated byROSCA members in subsequent discussions. Participantswere engaged in debating these models and their relativeadvantages and disadvantages. While several ROSCAgroups indicated their interest in piloting these models,these scenarios have not been tested for lack of resources

for such longitudinal research. These models act as ahelpful tool for micro-enterprises to achieve long-termsuccess resulting in sustainable poverty reduction. SinceROSCA groups are universal, and so are the four challengesdescribed in this article, these models are replicable andtransferable in developing communities around the world(Table 1).

3.2. Model representations

3.2.1. Model 1. Individual Ownership Model

3.2.1.1. Characteristics of the model.

! A ROSCA member acquires capital funds from ROSCA topurchase agricultural equipment.

! S/he purchases profitable equipment for a venture s/healready understands.

! The equipment vendor teaches him/her necessarytechnical skills.

! The ROSCA also acts as a support network.! Additional ROSCA members acquire capital to purchase

equipment after witnessing the success of the first

Table 1Symbol key for interpreting the models.

Symbol: Stakeholder

Group memberOwner of technology productTechnology manufacturerKnowledge transfer

Fig. 2. Model 1. Individual ownership model.



member in the ROSCA to utilize the full potential ofgroup membership to overcome the four barriers tolong-term success.

Overview: Onemember of a ROSCA group decides to usefunds to purchase an affordable greenhouse. Greenhousesare known to increase yield and extend the growing season.News quickly spreads about the success of this greenhouseand other members begin to make similar purchases withtheir ROSCA funds. As each growing season passes, moremembers become knowledgeable about ways to optimizegreenhouse farming and share this information with othermembers.

3.2.2. Model 2. Shared Ownership Model


! Financial capital is provided by the ROSCA group.! The members purchase the equipment based on infor-

mation shared within the group.! Ownership is given to every member in the ROSCA

group.! The members take turns caring for the equipment and

related business.

Overview: Ten members of a ROSCA group gathermoney to begin a group venture. After searching fordifferent profitable business options, they decide to buildroosts to raise chickens because chickens are relatively easyand less expensive to raise than cows or pigs. The membersrely on their indigenous knowledge, but are not experts inchicken rearing and thus make some expensive mistakesbefore becoming successful. Later, the group scales up theirventure by contacting other ventures and buying morechickens.

3.2.3. Model 3. Third-Party Ownership Model


! Financial capital is provided by an external SACCO orother financial institution.

! A profit-sharing agreement is made between thefinancier and ROSCA group.

! Members take turns caring for the equipment andrelated business.

! As time passes, ownership-transfer agreements may bedeveloped.

Overview: A ROSCA group decides to seek out value-added technologies for their members' excess cow milk.After contacting regional market retailers, they discoverthat there is a growing market for yogurt. They seek out aSACCO to help finance the necessary capital investments forthis venture. The SACCO decides to purchase all of theequipment and enters a profit-sharing agreement with theROSCA. As the months pass, the SACCOs share pays back forits investment. After a period of time, the SACCO allows theROSCA to gain ownership of the technology through anagreed upon number of payments.

3.3. Comparison of models

Table 2 summarizes the characteristics necessary ofusers and technologies for each of the models, across eachof the four previously mentioned metrics.

3.3.1. Access to capitalAccess to capital refers to the ability of members to ac-

cess resources necessary for the startup of micro-enterprises. This is the primary purpose of the ROSCA; ineach case, users have greater access to capital than if theywere not involved. However, the three different models

Fig. 3. Model 2. Shared ownership model.

Fig. 4. Model 3. Third-party ownership model.



have characteristics that make some relatively moreattractive for certain types and amounts of capital. Lowercapital, reliable payback technologies will be suitedwell forthe Individual Ownership Model (Fig. 2). The users areindividually responsible for repaying the ROSCA, andtherefore will only purchase the technology if they arecommitted to its use and upkeep. Bee keeping is anexample of a technology that could be pursued by indi-vidual members of a ROSCA. It requires frequent moni-toring and can be constructed by the user at relatively lowcost.

For the Shared Ownership Model (Fig. 3), higher capitaltechnologies can be purchased since ROSCA members arepooling their resources. However, this collective re-sponsibility on maintenance requires significant levels ofsocial capital of its members. Smaller communities withfrequent social interactions would most successfully beable to share either the technology or its profits. Thepayback period is not as important as in either of the othertwo models, since responsibility is divided amongst allmembers. A common cooperative in Kenya is tea produc-tion. Smallholder farming accounts for 62% of tea produc-tion [10], and tea-processing cooperatives have gainedpopularity. These processing cooperatives allow for small-holders to share processing equipment that would be toocostly or cumbersome to own individually.

High capital, short payback technologies would be bestsuited for the Third-Party Ownership Model (Fig. 4). Theresponsibility in this model rests upon the external finan-cial institution that may not have any prior connection tothe ROSCA. However, this model can reach potential tech-nology users that would not be able to supply the necessarycapital otherwise. The short payback is a necessity to

maintain involvement. Since this model would typicallyexist with users holding very little collateral, the technol-ogy would need to create value quickly and visibly. A sun-flower seed oil generator is an example of such atechnology. Immediately upon use, selling electricity tonearby businesses can generate profits. Farmers can growsunflower seeds and be paid according to their harvest,providing an easy way to manage profit sharing.

3.3.2. Technology transferThe transfer of the technology is primarily the re-

sponsibility of the manufacturer. The characteristics of thetechnology itself dictate which model it may be best suitedfor. Smaller technologies designed for use by only a fewpeople would work best for the Individual OwnershipModel. Furthermore, users must live in locations where thetechnology could easily reach. This may be difficult forlarger technologies or those with outputs that requirefrequent transit to markets. Drip irrigation is a viabletechnology for this model, in that it can be easily trans-ported and requires no movement after installation. Itsinnovation is in reduced water use and improved yields, itcannot be easily shared among different farmers, and itdoes not require new means of transportation. Instead, itincreases yields on produce that is already being sold.

Technologies that are either much larger, or are mobileand shareable, would work well for the Shared OwnershipModel. A hay-bailer is an example of a technology that isboth mobile and can be shared amongst members, yet maybe too expensive for an individual to own. Therefore, thistechnology would fit best with the Group OwnershipModel. The Third-Party Ownership Model would work wellfor technologies that may be complicated to construct and

Table 2Comparison of the three models.

Characteristics for success

Individual Group Ownership Third-Party Ownership

Access to capital Technology Low capital, reliable payback Higher capital Highest capital, short payback,profitability well known amongstcommunity

Users Able to provide significanttime commitment

High social capital amongst users,small and tight-knit communities

Available to lower-income communities,users must be reliable for long-term use

Example Bee keeping Tea processing Sunflower-seed oil electrical generator

Technology transfer Technology Smaller, difficult to share Mobile, easily shareable Easily shareable but complicated toconstruct or manage

Users Live in accessible locations Able to acquire common landor central location

Third-party able to construct agreementto acquire or borrow a user's land

Example Drip irrigation Hay baler Dairy processing

Knowledge transfer Technology Reliance on experiential learning Reliance on indigenous knowledge Reliance on expert knowledgeUsers Informally connected to

share informationRelated experience to maketechnology effective

Committed to attend trainings, able toaccess third-party for follow-up

Example New seed varieties Milling Large-scale Greenhouse

Market linkages Technology Easy to market and local demandfor technology outputs

Technology outputs or profitable to be shared

Market for technology outputs can beregional or national, accessedthrough third-party

Users Active, well-connected, entrepreneurial Can organize bulk sales,group trust to makemarket decisions for each other

Must be trusted to abide byprofit-sharing agreement

Example Improved arrow root farmingtechniques

Solar dryer Juice bottling plant



manage. Since greater responsibility is placed on thefinancier, adequate training and communication with themanufacturer is more likely. For larger-scale technologies,it requires an agreement to be reached between thefinancier and a landowner. For example, a dairy processingplant could be externally funded and constructed on theland of one of the ROSCA members. A profit-sharingagreement could be reached with a minimum quota ofmonthly production. The ROSCA member who owns theland would be compensated on a monthly basis as part ofthis agreement. Initial construction and installation of thedairy processing equipment would requiremanagement bythe financier.

3.3.3. Knowledge transferThere are two forms of knowledge transfer necessary for

the success of any technology. Expert knowledge transferrelates to the operations of the new technology and asso-ciated improved agricultural techniques. The responsibilityof this type of knowledge transfer rests on the manufac-turer, and is necessary for the technology to be properlyused and maintained. For a micro-enterprise to be suc-cessful and sustainable, peer-to-peer knowledge transfermust also occur. Technologies that don't require muchexpert-knowledge transfer, but may require experientialpeer-to-peer transfer, would be best for the IndividualOwnership Model. Several people would be using thetechnology at the same time, allowing for several usagecases to be tested. For example, some members of a givencommunity typically test new seed varieties. Word spreadsas to the best and worst varieties, with users learningthrough the trial-and-error of their peers.

A Shared Ownership Model would be ideal for tech-nologies that involve greater amounts of indigenousknowledge, since work is conducted in a centralized loca-tion and social interactions are frequent. People can learnfrom the historical practices of each other. Cereal produc-tion, such as finger millet and sorghum, is labor-intensiveand difficult but has been going on in East Africa for gen-erations. A milling operation shared by a ROSCA would bemade most effective by farmers with knowledge in effec-tive cereal production techniques. The more knowledge-able users could share their techniques with others,improving the overall production of the operation. In theThird-Party Ownership Model, expert knowledge may bemore readily accessible, since the SACCO is responsible forproper training to be conducted. Greenhouses are a greatexample of the importance of expert knowledge for thesuccess of a technology. Construction, irrigation, and dif-ferences in agricultural techniques must be passed downfrom experts. Different diseases arise with greenhousesthan those with open-air farming, requiring new pest-control techniques and preventative measures.

3.3.4. Market linkagesMarket linkages are especially vital for direct value-

addition technologies, but are generally important for thesuccess of any agricultural product. Local markets are notalways sufficient for maintaining profits from certainagricultural products. In the Individual Ownership Model,users are least connected and therefore personally

responsible to organize any bulk pricing schemes. Arrow-root is a high-valued cash crop in many regions of Kenya,with significant local demand. Improved arrowroot tech-niques allow farmers to grow this tuber with increased landproductivity. Since little market searching is required, in-dividual farmers can profit from the arrowroot withoutneeding bulk pricing or distant market access.

In the Shared OwnershipModel, either the profits or thetechnology is shared amongst members, leading to agreater need for interdependence in order to generatesuccess. Members are more likely to work together, leadingto stronger market linkages. For example, solar food dryersreduce post-harvesting losses since dried produce is lesssusceptible to insect infestation and natural deterioration[13]; however, in regions where fresh produce is availablethere is typically low demand for the dried version. In orderfor users of solar dryers to be successful, they must accessmore distant, harder-to-reach markets. As members of aROSCA, the users will be able to leverage their ties, poolresources, and negotiate together in order to access newmarkets. The Third-Party Ownership Model provides evenmore networking potential, as the geographically largerSACCO has a stake in profits, and therefore will leverage itsconnections to reach new markets. For example, a mangobottling plant has a high capital cost, but with propermarketing can reap quick payback. Individuals, and even anentire ROSCA, may not be able to afford the investment, butwould be willing and easily able to profit, especially duringmango seasonwhen supply overtakes demand. An externalinvestor who may have connections to national marketscould fund this bottling plant).

3.4. A comparison of opportunities and risks

Risks and opportunities of the different models varyamongst stakeholders and technology characteristics; it isimportant to acknowledge these differences whenchoosing a model to implement. Users would be morelikely to consider the Individual Ownership Model if thetechnology is difficult to share, labors is difficult to divide,or the product is not cost prohibitive for individual users.The Shared Ownership Model works best for them when atechnologymay be expensive, but the return on investmentis well known and markets are reachable, particularlythrough bulk negotiations. The Third-Party OwnershipModel is most applicable for technologies with longerpayback times, more complex markets, or complicatedmaintenance. Third-party financiers are only directlyinvolved in the Third-Party Ownership Model, and wouldbemost willing to participate if they can find ROSCA groupsthat have proven responsibility through previous projects.Therefore, the manufacturer may first choose to set up aShared Ownership Model in new regions to prove profit-ability in order to eventually strike up a deal with afinancier for the Third-Party Ownership Model. The finan-cier must weigh the risk of investment with the opportu-nity cost of missing out on the initial profitability of thetechnology in a new environment (Table 3).

Technology manufacturers encounter different riskswith each model. For the Individual Model, they mustprovide a technology that is simple and resilient. The



success of the technology in a region will be based on theexperience of a few separate users, with limited in-teractions between the manufacturer and those users. Inorder to get more orders from a given ROSCA, the usersmust consider the technology to be worthwhile and prof-itable. Therefore, it is the responsibility of themanufacturerto ensure that the technology is designed to generateprofits quickly and visibly. For the Group Model, the repu-tation of their technology rides largely on the success of thegroup dynamics. While socially dramatic events couldoccur that have nothing to do with the technology, thereputation of that technology could be permanentlydamaged. A centralized location with more users providesgreater flexibility in the complexity of the design of thetechnology; experiential knowledge transfer will occursince the success of the users is largely interconnected. TheThird-Party Model provides an opportunity for the manu-facturer to focus less on minimizing the initial price of thetechnology andmore onmaximizing the profitability of thetechnology. This is very different from the perspective themanufacturer should have on the Individual Model, whereeconomic availability of the technology is paramount. Inthe Third-Party Model, the responsibility of proper use willbe placed on the financial institution, providing themanufacturer with a more official line of communicationfor expert knowledge transfer.

Based upon discussions with several ROSCA groupsactive in May 2012, there is evidence that many membersof ROSCAs seek own and operate enterprises either throughindividual member ownership or group cooperation.ROSCA structures have not been used to facilitate theestablishment and growth of the enterprise in the majorityof these cases. More often it serves as a social supportnetwork for the operator as they continue their struggle tomaintain and grow their enterprisewhile still providing thebasic needs of their family, resulting in the maintenance ofthe status quo. Moving beyond the current state of affairs isthe long-term goal for sustained poverty reduction.Adopting the ideas and practices set forth through thesemodels will place the community members on the appro-priate path to achieve this goal.

4. Conclusion

Partnering with self-help groups such as ROSCAs canfacilitate overcoming the four major challenges faced bymicro-enterprises in developing nations; access to capital,technology transfer, knowledge transfer and market link-ages. However, external entities looking to establish

themselves with these groups are at a disadvantage fromthe beginning, because ROSCAs are built around mutualtrust and “commonality”. The commonality can be location,family, tribe or employment. Regardless of the distinction,commonality is a source for trust within the group. Outsideentities attempting to connect with the groups must takepro-active steps to establish a similar level of trustworthi-ness. Outsiders may find it easier to connect with ROSCAsby working with another actor that coordinates with thesegroups. Actors can be either groups themselves partneredwith ROSCAs or individuals that are willing to serve as afacilitator of introductions to the group. These individualsare more than likely going to be a member of the ROSCAand therefore be trusted by the other members. Addition-ally, several groups have attempted to organize ROSCAs inorder to build more social and financial capital for the start-up and success of micro-enterprises. For instance, churchesand non-profits may do this in their interaction withcommunity groups. Additionally, ROSCAs can register withSACCOs in order to establish access to formal financialservices. These SACCOs can help outside entities establishmutually beneficial relationships with registered ROSCAs.

Another entity that is increasingly getting engaged withROSCAs is the government. In Kenya for example, ROSCAgroups are choosing to self-register with the government inorder to formalize their operations. The process requiresthe group to submit written rules and regulations as well askeep well-documented records of meeting proceedingsand group activities that in turn must be verified by thereporting agency. In turn, registration offers groups a levelof formal security and protection. For instance, if membersmisuse funds or default on loans secured by the group,registered ROSCAs can seek help from the government inpursuing the individual responsible and recovering theassets. Another advantage of registration is that groups gainaccess to grants and other support opportunities. Finallyregistration is often a requirement for groups seeking toobtain financial services and support from SACCOs andsome other organizations. Registration has become animportant factor for outside entities when determiningwhether to partner with a ROSCA. A final thought toconsider when seeking a partnership with a ROSCA is thatthese groups are intricately connected to each other as well.Several individual members are likely to be members ofmultiple informal lending groups and can therefore serveas champions for your organization, enabling access tothose additional groups.

Like-minded individuals from the same communityunite and support one another through their involvement

Table 3Comparison of opportunities and risks.

Individual Group Third-party

User (ROSCA member) HIGH: personal capital in technology,little group help in profiting

MEDIUM: bad decisions or disagreementscould erode group trust

SMALL: doesn't provide startup capital,risks depend on agreement

Manufacturer HIGH: reputation dependentupon independent user experiences

MEDIUM: success dependent uponteamwork of group, ability toshare technology

MEDIUM: less ‘ownership’ by users risksdecreased technology productivity anddamage reputation

Third-party financier MEDIUM: misses out onprofit-making opportunity

MEDIUM: misses out onprofit-making opportunity

HIGH: relies on users to generateprofit as per agreement



in a ROSCA. The trust and social capital established throughmembership and commonality open many doors andcreate possibilities for long-term poverty reduction. Thecharacteristics of the agricultural technology, the relation-ship between the manufacturer and certain communities,and the strength of the ROSCAs in a given location are a fewof the factors that dictate which model is most effective fora given time. This paper proposes innovative ways ofadjusting the operations of ROSCA groups to become a toolto facilitate the development and growth of locally ownedand operated micro-enterprises that lead to long-termpoverty reduction and profitable business relationshipsfor technology manufacturers, financial institutions andcommunities. While there is no sure fire way to solution tothe global poverty problem this article has presented threemodels in which methods to overcome the barriers tosuccess that all micro-enterprises face in developing na-tions. These models provide a pathway for individuals torealize a reduction in poverty for themselves and theirfamily, resulting in greater positive impact throughouttheir community through duplication and inspiration.

Acknowledgments

The authors would like to thank Siri Maley for herfeedback and consultation. We also thank the staff of theChildren, Youth Empowerment Center (CYEC) and TaifaSacco, both in Nyeri, Kenya, for their help and support.

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