Are savings clubs a good alternative to traditional banking?
Informal savings clubs are a common form of savings outside the traditional banking sector. Researchers report that in addition to being a way to provide insurance or buy durable goods, they create a mechanism to provide their participants with the self-discipline needed to save.
Are informal savings clubs a good alternative to traditional banking? Unlike the latter, there are no stringent legal protections for these clubs, which tend to be popular in areas without access to traditional banking structures, primarily in developing economies and among immigrant communities. Instead of legal protections, these clubs are based on reciprocity and trust in the social and family ties between those involved, and they leverage these ties to create motivation to save.
Key points to remember
- Informal savings clubs, such as “susus” (also spelled “sousous”), are community pools where members each pay a fixed amount at certain intervals, and the total sum is paid out to one member at a time over a rotating base.
- They are common in areas without access to traditional banking services, although they have also become more common in the West.
- These are not just financial tools; rather, they are rather old tools that have been developed in many cultures around the world and promote cultural continuity within societies.
- As a financial tool, they often do not offer legal protection and instead rely on trust within club members, who are often family members or other closely related members of the community.
Savings club vs formal bank
Because they exist in many different cultures, these informal clubs go by many names. Brought by immigrants, informal savings clubs have become increasingly common in the West, often bearing traditional names such as “njangi”, “pandero”, “consorcios” or “sousou”. The more technical term is “rotating savings and credit association (ROSCA)”, although it may be difficult for those who participate in the clubs to identify.
In ROSCAs, people pool their money at certain intervals, and the total sum is paid out to one member at a time on a rotating basis. They are considered universal phenomena because they have occurred all over the world. Consider an example reported by NPR: In Kenya, they are called “merry-go-rounds,” due to the cyclical nature of payments. A 63-year-old Kenyan woman named Mary Abagi, for example, invested $10 a month in the pool with 10 other people, using charitable assistance from an American non-profit organization to make the payments. Each month, a different member would receive a payment. When the spin came to her, Abagi received $100, the total of her payout in the pool, which she used to buy a goat.
Unlike traditional banks or savings clubs organized through traditional banks, ROSCAs are informal. They usually don’t have the legal protections of a bank, which means that failure to comply with the terms of the agreement will usually not lead to a court. It is therefore vital that group members trust each other to continue contributing to the system. Otherwise, a member who got an early payment could theoretically stop contributing to the pool, leaving other members without their funds. The importance of community trust translates into a motivation to save, although the practice is not exclusively economic but also improves social cohesion. In fact, share capital replaces solvency in determining who is allowed to join.
There are other notable differences that are relevant to the financial use of the tool:
- Liquidity-ROSCAs do not provide easy access to disbursed funds. Once invested in the pool, a person must wait their turn during the spin to get their payout. This is notably less liquid than the traditional bank.
- The interest-ROSCAs do not pay interest. Versions of these associations, known as “accumulated savings and credit associations (ASCRA)”, do, but they are less common. Most of the time, however, people simply get back what they put into the program. In traditional banks, depositors receive interest on their deposit.
In the USA
Although normally associated with developing economies or people with low incomes, ROSCAs are actually used by both high socioeconomic people and in developed economies.
In the United States, these systems continue the tradition of pre-war Southern mutual aid societies that brought together insurance and social benefits for blacks in previous centuries. They have become more important with the decline of immigrants’ access to the welfare state since the 1970s, as well as the restriction of loans and the increase in inequality since the Great Recession, according to academic accounts.
Contemporary uses of ROSCAs in America have been found to vary, including for large expenses such as weddings and funerals, with the relative success of small businesses of West Indian and Asian immigrants in the country sometimes being attributed to the use ROSCAs for start-up capital in place of credit. There are no solid statistics on the number of such clubs in the United States, but estimates suggest they are very common.
Scams posing as ROSCAs also occur. The U.S. Federal Trade Commission (FTC) has warned against fake “sousou” clubs following protests over the killing of George Floyd. A “sousou” is an informal savings club originating in West Africa and the Caribbean. However, the fraudulent “sousou” clubs were illegal pyramid schemes that promised investors that they would receive more money than they invested, cynically linking investments to social causes such as Black Lives Matter to encourage investment. in the systems. Legal savings clubs don’t promise profit, only savings, according to the FTC.
Not all “Susus” are scams
Proponents of “susus” have been quick to point out that illegal pyramid schemes with the same name are not the same thing; rather, they take advantage of this legitimate societal practice to attract investors.
What is a ROSCA savings plan?
A rotating savings and credit association (ROSCA) is an informal type of bank in which members pool their money and take turns disbursing the savings. They occur all over the world and have many different names.
What are the advantages of ROSCA savings plans?
Informal savings clubs can leverage social motivation to encourage savings, especially in areas without easy access to traditional banks. However, they also have disadvantages that traditional banks do not have.
Are “Susus” legal?
Informal banking groups such as “susus”, originating in West Africa and the Caribbean, do not offer the same legal protections as traditional banks. Instead, social groups encourage saving. Some pyramid schemes disguised as “susus” are illegal, but informal clubs are not.
Most people who use ROSCAs are looking for financial security. ROSCAs are more common in women than in men in some societies, such as Kenya. They may be a way for married women to protect household savings from immediate consumption, in which case inability to access funds for a period of time and re-engagement in a particular expense become desirable features of clubs.
ROSCAs can be a good complementary tool to traditional banking, which leverages social ties to help users save money and increase purchasing power, enabling expanded access to credit while avoiding associated fees to the traditional bank. They can also serve as a good informal structure for developing economies and places without reliable access to traditional banking structures, especially in countries where many people are unbanked. It is also important to note that they enhance socialization within a society and are not just an economic tool.
However, the informal nature of these clubs brings possible drawbacks when viewed as a primarily financial device in competition with traditional banking, some of which have already been mentioned. Notably, they do not offer the legal protections of traditional banks or the ease of access to savings, and they do not pay interest on invested funds.
Some studies have suggested that blockchain technology could improve the performance of ROSCAs for unbanked and underbanked parts of the US economy.