On the Development of Rotating Credit Associations in Japan

Abstract

Financial intermediation, through raising returns to investment, contributes to economic growth. Informal financial schemes are often integrated in formal, well-organized national financial systems. The development of "mujin-kō" or "tonomoshi-ko," an important informal financial intermediary in Japan is examined. It is the rotating savings and credit association (RoSCA), which has provided funds to small- and medium-sized firms in the local sectors of Japanese economy. A historical overview of "mujin," the Japanese form of RoSCA, is provided along with a list of both advantages and disadvantages such a system entails (The Mujin Finance Law). Reviewing current literature on the RoSCA, it is suggested that the RoSCA is a desirable device for a socially-connected group, which improves on the savings of those without access to a different capital market. "Mujin" was originally formed to provide charity to economically-disadvantaged classes, but fragmented evidence suggests that "mujin" was used extensively by lower-income households. Findings indicate that Japan's "mujin" has expanded internationally to Korea and Taiwan, and most of the features of the RoSCAs abroad can be found in the Japanese versions. The evolution of financial intermediation at the informal level, the function of contingent contracts in financial transactions under incomplete information, and the role of the government in shaping the modern financial system are also discussed. After the enactment of the Mutual Bank Act, "mujin" companies and mutual banks were forcefully merged and integrated, in keeping with the Japanese government's attempt to consolidate, rationalize, and economize the activities of the "mujin." (CBS)

Keywords: Mujin, Mutual Bank Act (Japan), Rotating Savings and Credit Association (RoSCA), Financing, Low income groups, Low income groups, Public policies, Credit, Lending policies