Are savings clubs a viable alternative to traditional banking? Well, the world of finances is constantly being redefined by new systems, and savings clubs seem to show potential. Curious to know if savings clubs are worth the hype? Join us and find out!
The Unconventional Charm of Informal Savings Clubs
Informal savings clubs, a common form of thrift outside of traditional banking, offer a unique blend of benefits. They not only serve as a means to provide insurance or purchase durable goods but also instill a sense of self-discipline among their participants. However, unlike traditional banking, these clubs lack rigorous legal protections, making them popular in areas without access to conventional banking structures.
These clubs, known by various names such as njangi, pandero, consorcios, or sousou, are based on reciprocity and trust. They leverage social and familial bonds to create a motivation for saving, making them a fascinating alternative to traditional banking.
The Global Phenomenon
Rotating Savings and Credit Associations (ROSCAs) are a universal phenomenon, occurring all over the world. In these associations, people pool their money together at certain intervals, and the full sum is paid out to one member at a time on a rotating basis. This cyclical nature of payouts has earned them the nickname ‘merry-go-rounds’.
However, unlike traditional banking or savings clubs joined through traditional banks, ROSCAs are informal. They do not typically carry the legal protections of a bank, making trust among members crucial for their success. This community trust also provides a motivation to save, improving social cohesion.
The Diverse Appeal of ROSCAs
Contrary to popular belief, ROSCAs are not exclusive to developing economies or low-income individuals. They are joined by people in higher socioeconomic groups and those in developed economies. In the U.S., these systems have become more prominent with the decline of immigrant access to the welfare state and the restriction on loans since the Great Recession.
The uses of ROSCAs in America vary, including for major expenses such as weddings and funerals. The relative success of West Indian and Asian immigrant small businesses in the country is occasionally credited with the use of ROSCAs for startup capital in place of credit.
The Dark Side: Scams Masquerading as ROSCAs
While ROSCAs offer numerous benefits, they are not immune to misuse. Scams masquerading as ROSCAs have been reported, with the U.S. Federal Trade Commission warning of fake “sousou” clubs that promised investors more money than they put in. However, it’s important to distinguish between these illegal pyramid schemes and legitimate savings clubs.
Proponents of “susus” have been quick to point out that illegal pyramid schemes with the same name aren’t the same thing; rather, they trade on this legitimate societal practice to entice investors.
What about Financial Security?
Most people who use ROSCAs are pursuing financial security. They can be a way for married women to protect household savings from immediate consumption, in which case the inability to access the funds for some time and the recommitment to a particular expenditure become desirable features of the clubs.
ROSCAs can represent a good supplemental tool to traditional banking, one that leverages social bonds to help users save money and increase purchasing power, allowing expanded access to credit while avoiding the fees associated with traditional banking.
The Potential Disadvantages
The informal nature of these clubs brings possible disadvantages when considered as a primarily financial device in competition with traditional banking. Notably, they don’t offer traditional banking’s legal protections or ease of access to savings, and they don’t pay interest on invested funds.
However, they can serve as a good informal structure for developing economies and places without reliable access to traditional banking structures, especially in countries where many people are unbanked. It’s also important to note that they improve socialization within a society and are not solely an economic tool.
The Future of ROSCAs
Some studies have suggested that blockchain technology could improve the performance of ROSCAs for the unbanked and underbanked portions of the American economy. This innovative approach could potentially enhance the efficiency and security of these informal savings clubs, making them an even more attractive alternative to traditional banking.
As we continue to explore and understand the potential of ROSCAs, it’s clear that these informal savings clubs hold a significant place in the future of financial management, offering a unique blend of social cohesion and financial empowerment.
