More than two decades after the end of apartheid and we are still living in a deeply divided society, which has given rise to two very different financial systems. These are the unregulated informal financial sector that has developed in response to past disenfranchisement, and the modern formal financial institutions some of us access through conventional banks.
We are led to believe that the formal sector is incredibly efficient and that it is being dragged down by the unregulated, unstructured informal sector. However, after doing much research into the dynamics of the informal sector, it seems that it is a booming and efficient ecosystem of its own that the formal sector could learn a lot from. This informal financial sector developed from stokvels.
Stokvels are part of a traditional saving system and have been used for generations to pool money in order to buy high-value items. They are often overlooked by the formal sector as outdated and highly inefficient. However, the stokvel industry is worth R45 billion and is made up of 11 million South Africans. It has been borne out of necessity. The formal sector tends to view stokvels as vehicles that generate no interest, are cash-based and are fraught with crime and theft. This is not true. What if I told you that the average stokvel generates returns in excess of 40% per year and that people in rural/peri-urban areas are more likely to take a loan from a stokvel at 30% interest a month than a formal loan from the bank?
In our research in Khayelitsha, Cape Town, we dug deep into the dynamics of the local stokvels. What we’ve found is that the majority of community members will always approach a stokvel first to obtain a loan before approaching the formal sector and that the default rate on loans given out by stokvels is generally lower than the default rate on loans given out by the formal sector. This is because stokvels generate an extraordinary amount of social capital – non-financial benefits that include community pressure, social respect, social education and social interaction. These factors are viewed as more important in the capacity building of members of a community than the financial returns a bank could ever give them.
Additionally, if social capital is used and managed effectively, it can result in an incredible amount of trust and understanding that pushes default rates down and allows for returns in excess of 100% to be generated.
The stokvel sector has not only allowed people to buy groceries during the festive season or to access burial insurance, but stokvels themselves have single-handedly empowered single mothers to build homes, put their children through tertiary education and have even allowed people to start businesses.
Many of the single mothers we spoke to said that when they moved to Harare in Khayelitsha in the mid-90s, their government grants only allowed for building a concrete slab. They were then responsible for funding the balance needed to build a house. So how did they do this? They formed groups of about 20 single mothers who all needed to build houses. They then came together and all applied for loans from formal banks. The banks would generally only grant five out of the 20 women the required money and so they would form a stokvel to pool together enough money to fund the remainder. They would first help the five women granted loans by the banks. They would repay their loans quickly by pooling money and recording how much each of the five women were helped. Once the money that had been pooled had paid off the intitial five loans, these same five women would take out additional loans to help the remaining 15 women build their homes. This was done in stages based on the need of each of the women, because they would only be able to get five loans at a time.
This shows the power of the informal banking system and how it is crucial to community development. It highlights the value of building bridges between the informal and formal economies and how when the two eco-systems work together we can truly reach synergetic outcomes. The stokvel sector in South Africa is an incredibly efficient one, generating extreme returns, offering quick capital to surrounding community members and recording some of the lowest default rates at the same time.
While people participating in the informal economy are figuring out the best practices of combining the two economies, it is time for the formal economy to wake up, recognise the potential of the informal sector and facilitate the growth of a truly African banking system, the stokvel.
Sebastian Daniels & Anthony Jacob are BBusSci Finance Honours students at The University of Cape Town.