The power of stokvels

After much research into the informal financial sector’s dynamics, it seems it’s a booming and efficient ecosystem of its own that the formal financial 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 to buy high-value items. They are often overlooked by the formal sector as outdated and highly inefficient. However, it’s worth R45 billion and comprises 11 million South Africans.

In our research in Khayelitsha, Cape Town, we found the majority of community members will always approach a stokvel first to obtain a loan before approaching the formal sector and the default rate on loans given out by stokvels is generally lower than that given out by the formal sector.

This is because stokvels generate an extraordinary amount of social capital – including community pressure, social respect, social education and social interaction. These factors are viewed more importantly in the capacity building of community members than the financial returns a bank could 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 of over 100% to be generated.

The stokvel sector has allowed people to buy groceries during the festive season, access burial insurance, empowered single mothers to build homes, put children through tertiary education and allowed people to start businesses.

Many single mothers we spoke to said when they moved to Khayelitsha in the mid-90s, government grants only allowed for building a concrete slab.

They were responsible for funding the balance needed to build a house.

So they formed groups of about 20 such single mothers. The banks would generally only grant five of the 20 the required money; so they’d form a stokvel to pool together enough money to fund the remainder.

They’d first repay the five women’s bank loans quickly, by pooling money. Once the intitial five loans were repaid, these same five women would take out additional loans to help the remaining 15 build their homes.

This shows the power of the informal banking system and how it’s 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.

Sebastian Daniels and Anthony Jacob are BBusSci Finance Honours students at the University of Cape Town.