A little over a decade ago, the National Stokvel Association of South Africa estimated that there were more than 800,000 stokvel groups in the country, comprised of some 13 million members. As stokvels are unregulated, it’s difficult to know how many operate now, but it’s fair to say that a significant portion of the population is part of a stokvel.
This article investigates the pros and cons of this form of collective saving, and considers how stokvel groups can boost their finances.
Tip: Did you know that stokvels can invest in unit trusts? Find out more about unit trusts here.
What is a stokvel?
A stokvel consists of a group of people who enter into an agreement to pool together and contribute a certain amount of money towards reaching a set goal.
Palesa Lengolo, author of Stokvels: How They Can Make Your Money Work For You, says, “The group has full control of how they would like to use this money – they can save it and share it later, or invest it.”
Lengolo points to three important ways in which a stokvel can help you reach your goals.
- Stokvels help with accountability. If you find it hard to put money away, a stokvel holds you accountable because of your agreement with the other members.
- Pooled money can earn better returns because of the higher capital pooled, while the cost is reduced due to shared fees. Banks offer higher interest rates on larger amounts, while fees are decreased, or even dropped, if the amount is large enough.
- You may learn something! Some stokvels operate like investment clubs and invest in the stock exchange or companies. Members do their homework, deliberate about which shares or companies to invest in, and make investment decisions. This helps to improve financial literacy.
The due diligence process
Busi Skenjana, founder of the Stokvel Academy and author of Move! Stokvel Guide, says a stokvel should ideally be made up of people you know, trust and can contact easily.
“If a new party happens to be a stranger, they must come highly recommended by a friend. A reliable referral system is key.”
Skenjana says you should conduct an affordability assessment on any potential member, to ascertain whether they can meet their financial obligations.
“Interview them to understand where they work, who maintains them, and how reliable their source of income is,” she says.
New joiners should be in alignment with the goals of the group. “If you have a burial stokvel, you can’t have someone who will pay late or make excuses, because burial costs need to be paid urgently,” she says.
Prior to joining a stokvel, Lengolo recommends asking for the group constitution, or at least the group profile, and that you ask as many questions as you can.
“A constitution is a confidential agreement among existing members,” Lengolo says. “Some groups may have a generic document they share with potential members, and a detailed and customised internal document for members only.
“A group might not be comfortable sharing their constitution with non-members, simply because their policy is like a confidential company document, not because they have something to hide.”
Where is the money saved or invested?
Stokvel savings are typically kept in cash – which can be risky – or deposited into a bank account.
“The norm is a bank savings account, but this is not ideal” says Skenjana. “I recommend that groups look for an account or fund that yields the best interest. Ask your bank consultant about the best product they can offer you.”
A registered, independent financial adviser may also be useful if you’re looking to invest in inflation-beating products such as unit trusts. The advantage with these is that there are no fixed investment periods, meaning you can withdraw your money at any time without incurring penalties.
“Most stokvels have at least three key roles; a chairperson, a secretary and a treasurer. If you need money from the pool, you should contact one of these three and a decision will be made as per the constitution,” Skenjana says.
Tips for success
- Lengolo says you should find a stokvel with a common goal. It makes saving that much easier if you’re all working towards the same thing, be it going on a holiday, buying land, or saving for "after tears" gatherings.
- Consult professionals and experts where necessary. “It’s worth outsourcing and paying for quality consultation, coaching or assistance with important agreements and legal documentation,” says Lengolo. “This helps manage the group’s relationships, which is key when working together.”
- If a member absconds with stokvel money, you can approach the Small Claims Court, says Skanjana. “Stokvels are not legal entities, but the Small Claims Court can make provision, depending on the amount of money owed. Unfortunately, it’s quite a technical process.”
Tip: Unit trusts are investment products that help to beat inflation. Find out more here.