Issue: July/Sept 2010


Taking stock

Can part of the savings and some of the savers in the informal sector be meshed into the formal? Can it help with retirement provision? Lise Pretorius asked key players on both sides. Maybe, they answer.

In a 2007 report, perhaps the most reliable to date, Old Mutual estimated that the value of savings circulating outside the formal institutions had grown to R33bn. Most of this “grey money” is in stokvels.

By SA standards, the agglomerated amount equates the size of a pretty large pension fund. It indicates that household savings are not quite as bad as official figures suggest, and also begs the question of whether stokvels can play a role in retirement savings.

A stokvel is an informal “institution of the people”, a means for individuals in a community to pool their savings. Community members agree amongst themselves what each person will contribute weekly, fortnightly or monthly. Withdrawals are then made for members in rotation, according to the rules of the particular stokvel.

The structure is determined by its purpose; from a simple savings scheme, to acquisition of assets, to investment and bridging finance. The savings are accumulated for a variety of possible purposes; from helping with such emergencies as funeral expenses to buying consumer items (where possible, to benefit from bulk pricing).

Andrew Lukhele, founder-president of the National Stokvels Association, explains: “Over the years, stokvels have been used to address people’s needs in ways not offered by the formal sector.”

Stokvels are based on family or community relationships and regulated by an underlying ubuntu, a classically African philosophy expressing community allegiances and values. Their reliance is on honour and trust, not laws and contracts as in the formal financial sector. They’re voluntary associations for self-help financial support, independent of the state and long preceding even the birth of micro-finance organisations.

According to a study at UCT’s Unilever Institute of Strategic Marketing, seven years ago over 2,5m South Africans were members of a stokvel. Not allowing for overlap, that’s about a quarter of the number who’re members of retirement funds. There are important differences between the two means of saving, but there are similarities too.

Retirement funds typically rely on fixed contributions from members in formal employment. They’re long-term investment schemes. They’re subject to specific legislation, regulation and tax treatment.

But stokvels, despite their long lives, do not have long-term investment horizons. “The purpose of the money is short-term,” points out Peter Dempsey, deputy chief executive of the Association of Savings & Investment SA. “They use banks to deposit the savings that they withdraw over relatively short periods, and some of the more sophisticated might go into unit trusts that are highly liquid. The investment instruments are not long-term but used to provide for consumption and asset acquisition.”

Because of the essential link between retirement funds and formal employment, Lukhele questions the meaning of ‘retirement’ itself: “Many South Africans haven’t worked in the formal sector, and won’t reach what it defines as a ‘retirement age’, so it’s difficult to see how stokvels and retirement funds can interface.”

There are also many amongst the poor, he notes, who can’t or don’t access social grants. Moreover, for decades the informal sector has had its own mechanisms for looking after the aged.

He adds: “You can be accepted as a stokvel member at any stage. If your contributions come from formal employment, a state grant, or selling tomatoes on the roadside, a stokvel doesn’t discriminate. People who were formally employed can still contribute to a stokvel after retirement. The community acceptance and involvement guarantees them a level of dignity.”

Back to Dempsey: “Bringing stokvels in to the formal retirement-fund space will require recognition that the existing models can’t be applied. We’d need flexibility and creativity.”

It’ll require adaptation by stokvels to long-term goals. “There is clearly a discipline of regular saving, so one way could be for younger members to put away part of the stokvel income to provide for older members. Stokvels already save for such events as funerals. Perhaps they could also save for such events as retirement or old age.”

A lot has to do with financial education, believes Lukhele: “Since 1994 there have been many opportunities for stokvels to graduate to cooperatives or cooperative banks, but there is a need to educate people about these opportunities and the choices available. Communities are comfortable with stokvels because they’ve been with us for generations.”

Current proposals to introduce a compulsory national retirement savings fund open a door for stokvels to move into this space, says Dempsey, creating opportunity for stokvels to engage with government and become part of the formal process.

Lukhele maintains that it doesn’t have to be one or the other: “There will always be stokvels. At the same time, as stokvels transcend various living standards, those who want to take advantage of the opportunities that come with the new government and business thinking should be afforded those opportunities.”