Thobela Mfeti | Glacier by Sanlam
The South African stokvel economy, with over 11 million local participants, is currently worth R49 billion. Stokvels are about “the power of a collective.” These individuals within the collective come together to pool money towards a common goal. The name stokvel originates from the term “stock fair” which describes cattle auctions run by English settlers in the 19th century. These stock fairs were a platform for farmers and labourers to socialise and pool money together to purchase livestock (African Response, 2012). Today, stokvels have many names such as ‘societies’, ‘umgalelo’ and ‘gooi-gooi’, to name a few. However, the essence of these groups remains to mobilise like-minded individuals towards achieving financial and social goals. More formally, African Response (2012) describes stokvels as a group of savings schemes providing for mutual and financial wellbeing as well as for the social and entertainment needs of their members.
Members of stokvels come together and make contributions of an agreed amount on a regular basis, usually monthly. The group decides on how the money is shared, whether it is a rotating lump sum payment to the members or saved and shared at the end of the stokvel period, which is commonly six months or a year. This decision is mainly dependent on the type of stokvel. Members of stokvels are always saving for something specific; they use these vehicles to raise funds for short- to medium-term financials needs, such as debt repayment (43%), emergency savings (44%), education (25%), groceries (31%) and the rest for clothing (18%) and other specific reasons (16%) such as building or renovating and/or buying cars or saving for a deposit on a car.
Five years ago, the African Response Market Researchers (2012) already believed that this industry was undergoing an evolution where investment stokvels were becoming more prevalent. In 2017, the Old Mutual Savings and Investment Monitor survey indicated that informal savings, of which stokvels comprise 53%, were the most popular form of savings and investing, after funeral policies. According to National Treasury economist Olano Makhubela, 60% of stokvels are investment focused while 18% are investment clubs and 22% are grocery stokvels. However, Makhubela questions whether the banking and investment fraternity is truly cognisant of the economic power of stokvels. In order for institutions to service this fast-growing informal industry they need to understand it, how it works and who the participants are.
There is a perception that stokvels are for ‘old women in poor communities’. However stokvels have become increasingly popular even with high income earners. According to the table below, most households with incomes above R14 000 per month in 2016 belonged to a stokvel. The more the household earns, the higher the incidence of belonging to more than one stokvel. In 2017, 42% of households with an income of R40 000 and above belong to more than one stokvel.
Research done by African Response in 2012 highlighted that stokvels are used by both male (42.6%) and female (57.4%) investors, with investment stokvels skewed towards males (53%) while grocery stokvel members were mostly women (86%). This research also indicated that stokvel members predominantly fall between the ages 25 to 49 years (78.2%). Old Mutual’s 2013 survey also showed that the number of youth (ages 18 to 30 years) using informal savings has increased. According to the survey, 63% of young people save through informal savings compared to 49% of the general population.
Most members of stokvels are employed and economically active members of society. The majority (83%) of these members have some form of employment (formal or informal). Most members fall into living standards measures (LSM) 5 and 6 (32% and 27% respectively). However, these saving schemes are also attracting higher LSMs, with LSMs 8 to 10 now accounting for 20% of stokvel members.
What are the main reasons for belonging to a stokvel and what is the glue that keeps these groups together? The sense of belonging and support is at the centre of why individuals belong to stokvels. There is a sense of being part of a support structure, especially in difficult situations. These are groups of individuals from a certain social circle, whether within the same community, working colleagues or friends. The recruitment of a stokvel member is still highly referrals-based, where someone brings in a friend or a family member that they trust into the group. Therefore stokvels are built on trust; this becomes the foundation of the relationship.
Stokvels are also seen as an effective mechanism of encouraging the savings culture within the group – individuals that feel they cannot save on their own join a stokvel because they believe that the group creates the pressure that helps them commit to their contributions. Stokvels are also seen as an easy way to access interest-free capital at no cost and there are no forms to complete or credit checks to be done.
The main concern when it comes to doing business with stokvels, especially from corporates, is the informal nature and the perception that stokvels are unstructured. However, stokvels do have formalities. Many stokvel members indicate that they are guided by a constitution. A chairperson, treasurers and other portfolios are elected for the efficient running of the group. The meetings are formal with a set agenda followed.
Trust within the groups is an important aspect in understanding this market as well as bridging the gap with financial advice. Many informal savers don’t seek financial advice as they believe the amounts they’re saving are not large enough to warrant consulting an adviser. There is definitely a gap to be closed and a role that can be played by financial advisers in ensuring that these short-term savings are channelled through to longer-term investments which may be more aligned with the interests of the higher income earners or LSM groups in particular.
Investment and stokvels
The size of the informal savings industry and the number of participants is testament to the fact that these investors are serious about their savings and that they have the financial discipline and commitment needed to maintain savings into a financial product.
Stokvels are short term in nature. In a rotating stokvel, each member gets a turn to receive a lump sum of pooled contributions at least once in the lifetime of the stokvel. The lifetime is typically six months or a year, depending on the number of members. Stokvels can be used by individuals to establish a sizable amount of capital to invest in a formal and a longer-term investment structure. ‘Stokvellers’ can use their capital to access longer-term and higher growth assets through products such as tax free savings accounts (TFSA) or retirement annuities (RA). Stokvel savings should be recognised in a holistic financial advice process. It can be seen as a way to meet shorter- to medium-term financial needs while working towards longer and more stable financial goals.
Stokvels can be used to fund retirement savings, with approximately half of the informal savers currently without a pension or provident fund. Most of these people have funeral policies, which goes to show that people generally prepare more for events with certainty such as death than they do for events that are dependent on probability (less certain events) such as retirement. The national savings rate is currently at 16%, therefore South Africans do not save enough. More and more people retire with insufficient savings to fund their retirement, making stokvels an ideal vehicle to be used in bridging this gap towards providing for sustainable investments.
The new face of stokvels: future investment companies
There has been a shift in the stokvel savings community towards longer-term investing, with investment clubs now investing in vehicles such as property or equities. The idea is similar to stokvels where the members contribute to the investment club on a monthly basis, raising the capital to fund the investment for these long-term assets. The structure is usually treated as a company with the members having an equal ownership. These are stokvels which are more formalised in structure and more long-term focused.
Everyone stands to gain
As the corporate sector begins to understand and embrace stokvels, South Africa can increase its saving levels. Corporates cannot underestimate this fast-growing informal sector, however they need to service it differently from how the traditional formal investments are serviced.
The trick is not to remove the short-term nature of stokvels, but rather to overlay it with investment education and long-term investment options. Access to financial advice and education remains the catalyst needed in this fast-growing savings approach. However, most informal savers believe they cannot afford financial advice or do not know how to access it. Also, in this market financial advice is associated with high costs and high levels of savings and therefore not actively pursued. Financial institutions need to debunk these beliefs, reach out to ‘stokvellers’ and assist these savers to channel their hard-earned money toward sustainable, long-term growth investments that lead to wealth creation over time.
This is a powerful way of encouraging savings amongst the informal sector of our economy. There is an element of trust, a sense of belonging and encouragement embedded in the stokvel concept and this needs to be harnessed going forward. Harnessed properly, stokvels have the power to provide broader access to financial products for lower and middle class South Africans and to act as a catalyst towards sustainable wealth creation.