KIWISAVER SPOTLIGHT

WHAT if you were able to borrow money without paying interest? Sounds like a pretty attractive idea, the sort of thing a loan shark would hate. But, amazingly, it is possible.

In New Zealand, there are about 20 savings pools – informal groups of people who pool their savings and lend to each other without charging interest.

Members agree to contribute regularly to the pool, and can request a loan when they need one. If the pool agrees, the person borrows money for a set term and repays it every month, plus an additional amount to keep funds available for others.

That may look similar to interest, but, at the end of the term, the borrower gets that extra money back.

No-one knows quite how many pools there are, but a good deal of them are attached to sustainable lifestyle network Living Economies.

Living Economies’ education trust chairman Phil Stevens says a savings pool is ‘‘basically where people get together and act as their own bank, with very strict reserve requirements, because obviously the money can’t leave the pool if it’s not there in the first instance. There’s no actual credit in the form of what banks do, which is to generate the money out of thin air when you draw down a mortgage.’’

Savings pools are not a new idea. Various forms of community savings and the concept of not charging interest occurs around the world, from the ‘‘susu’’ in the Carribean, to the interestfree equity partnerships of Islamic banking.

Living Economies draws its inspiration from Sweden, the home of JAK Bank, which pretty much works as one big savings pool with a much more corporate structure and, at last count, 38,000 members. But here in New Zealand, things happen in a slightly more grassroots fashion.

Pools can start with as few as four to five people, says Stevens, but ‘‘some of the bigger ones are in the 15 to 20 [member] range and, since the decisionmaking is all done on a consensus basis, I would expect things would get more difficult as groups got really large.’’

On joining, members sign a legally binding document, agreeing to the pool’s funding and lending methods. Two members become signatories but all transactions have to be approved by the group. The ultimate aim is for everyone to get back whatever they put in and make extra money by saving what they would have paid in interest.

They can use their pool to retire a credit card debt or student loan or pay for dental work, but if they want a tangible asset, the pool will usually buy it and transfer ownership when the loan is paid off.

Here’s an example of how it works, says Stevens.

‘‘A member goes to the pool and asks for $1000 to pay off a credit card, and it’s going to take 10 months to repay this at a rate of $200 a month. A hundred dollars of each of those payments is paying off the so-called principal. The other $100 is savings into the pool for others to use for that amount of time. At the end of those 10 months, when the complete repayment obligation has been done, that member can take out that $1000. So they’ve effectively paid off a $1000 debt and they’ve got $1000 in savings.’’

There’s another element that you won’t see in your average bank: a points system puts a value on the time you lend to the pool, at basically a point for every dollar a month. The points are used when working out how much extra you

The ultimate aim of a savings pool is for everyone to get back whatever they put in and make extra money by saving what they would have paid in interest. have to repay the pool when you’re repaying your loan.

Stevens expands on his previous example. ‘‘Say that member had previously saved some money in the pool, maybe $500. So in order to pay off their $1000 credit card debt, they would then take out their $500, plus $500 of the pool’s money. Because they would already have savings points from having $500 in the pool previously, depending on the amount of time, they may only need to put back $500 in the pool.’’

Stevens says the points system favours those who might not have much but save regularly.

‘‘A $100 contribution over 10 months would earn you 1000 points, which would be the same as a $1000 contribution in the space of one month. So small contributions for long periods of time can be very beneficial so members don’t have to be big savers.’’

In New Zealand, savings pools still lack the critical mass to help people avoid an entire mortgage. They tend to lend out four-figure sums, but a ‘‘pool of pools’’ has been formed which might evolve into such a lender.

‘‘We actually had a few people use savings pools to buy off mortgages and, as the amount in a savings pool grows, there’s no reason that, at some point, members could actually contemplate purchasing a property outright,’’ says Stevens.

How about saving for your retirement? The system might not appear to be great for that, but the argument goes that when the cost of a mortgage is often twice the value of the house, an interest-free system makes saving easier to achieve.

The type of people drawn to savings pools are usually known to each other. They are often involved in other lifestyle alternatives, such as permaculture, vegetable co-operatives, ‘‘green dollars’’ and ‘‘time banking’’. They are, says Stevens, ‘‘generally people who are . . . dissatisfied with mainstream finance and economic things’’.

‘‘There are a lot of people that are pretty unhappy with the way that modern banks and financial institutions have made this horrendous boom-andbust cycle into such a commonplace thing. There’s a big undercurrent of people doing this because it’s living their values.’’

It should be noted that savings pools work on trust. There’s no Reserve Banklike oversight, and if a repayment goes pear-shaped, the pool would either have to retake possession of the asset if it still owns it, or chase its money through the courts.

To Stevens’ knowledge, no payment problems have ever occurred with a New Zealand savings pool. And he says there’s no oversight on savings pools because there’s no interest involved.

‘‘Because there’s no money being charged, nobody is gaining a pecuniary advantage. These are just groups of people who consent freely to hold agreements with one another and that’s how they operate.’’

Claire Matthews, a banking expert at Massey University and a director of the New Zealand Association of Credit Unions, says she would be concerned about the reliance of pool members on each other. However, she notes that savings pools share similarities with credit unions, which return the profits of their banking system to members. She also acknowledges there are different views on how money should be controlled.

‘‘I accept that some people do have a view that interest of any kind is usury. I have a different perspective. It reflects a price for money and I think that’s reasonable. I think where it becomes usurious is where those rates are excessive.’’

The Reserve Bank regulates ‘‘nonbank deposit-takers’’ or NBDTs, and says a saving pool would only be considered an NBDT if it was found to come under the Securities Act. The Financial Markets Authority, which enforces the act, says that if a savings pool scheme involved an offer of securities to the public, it would need to meet the obligations of the act. Your Money profiles one KiwiSaver scheme each week. Provider: FirstChoice Scheme: Conservative fund Overview: This fund suits investors who accept stable but comparatively low returns. The FirstChoice KiwiSaver Scheme is provided and managed by ASB Group Investments. Its objective is to provide investors with conservative returns over the medium to long term, using an index-tracking investment management style for assets other than cash. Investors should be aware that returns may vary from year to year and may be negative. The fund’s investment policy is to invest in a high proportion of diversified income assets (cash and fixed interest) and in a low proportion in diversified growth assets (equities). It has 61 per cent in bonds, 20 per cent in shares and 19 per cent in cash. Since 2009 it has returned an average of 4.86 per cent, compared to a sector average of 5.57 per cent. Australian fund Vanguard International Shares Index makes up its largest investment allocation of 8.52 per cent followed by NZ cash, and cash equivalents in the Westpac Money Market Deposit account make up 7.13 per cent of the portfolio. No other individual investments are greater than 3 per cent of the portfolio. The fund started in October 2007 and has 6908 members. For a FirstChoice KiwiSaver Conservative Fund of $7900 the annual fees would be about $66.81 compared to a sector average of $102.23. Fund size: $90.14 million Total return over 1 year*: 5.13 per cent at May 31 versus an average for similar KiwiSaver funds of 5.16 per cent. Total return over 3 years*: 5.62 per cent versus an average for similar KiwiSaver funds of 6.10 per cent. Unit price: $1.39 Fees: Annual members’ fee is $36 plus 0.39 per cent of members’ investments compared to the average for similar funds of $27.75 plus 0.89 per cent of members’ investments. *After fees but before tax

Written by John Anthony using information from FundSource and the KiwiSaver provider.