By Qiniso Ntuli

Stokvels are said to make up a multi-billion rand industry in South Africa. Stokvels are a form of collective saving where the participants contribute on a monthly basis for one purpose or another.

Let us take a look at some of the different types of stokvels that exist. A stokvel can be rotational or cumulative. In a rotational stokvel, the contributions are paid to a member on a rotational basis, normally monthly. For example, where there are 12 members, each member gets their lump sum on a certain month. This type of stokvel is one we find rather pointless but we shall elaborate further later.

The cumulative stokvel normally has a purpose that is outlined in the constitution of the stokvel, it could be an investment club, grocery club, funeral society etc. Here there is a defined purpose and goal that brings the members together towards achieving a common goal.

Let us look at some commonly mentioned features of stokvels.

Sense of accountability: Contributing as part of a group holds you accountable and reduces the chances of you not contributing in a particular month, similarly to having a gym buddy, you don’t feel like going to gym but you go because you don’t want to disappoint your gym buddy.

More profits: There is a misconception that because we are contributing as a group and the proceeds are invested, the resultant growth will be more. This is incorrect; the member’s share is limited to the growth on their contribution. Basically, you could invest the same amount on your own in the same investment as the stokvel is investing in and receive the same growth.

Sense of belonging: There is no doubt about the unity and the friendships that develop over time by belonging to a group. However, the overriding purpose should be towards achieving a goal that is financially worthwhile and that grows your wealth over time, book clubs and many other social clubs can provide the same sense belonging and friendship.

Going back to the type of stokvel that pays out monthly, this type of stokvel is fruitless in our view. It does not take into account inflation, the member who gets their pay out first benefits the most. In a scenario where everyone (12 members) contributes say R1000. The second pay out and all the way to the last one is worse off when you factor in rising prices. The same lump sum can now buy fewer items than if you had received your lump sum first due to rising prices. Yes, you can argue the opposite in a situation where prices decline; but how often have you seen prices decrease in the last decade on the African continent? This is not too different from keeping your money under the bed for 12 months.

Rather, we favour the stokvels that seeks to grow the member’s wealth over time. These types of stokvels typically look to invest in unit trust schemes, on the stock exchange and possibly explore any opportunities that arise from having capital to allocate for economic opportunities.

So are they still relevant? Stokvels offer some great benefits, access to markets where there might have been a minimum investment, they offer cost efficiency as the costs are split between a larger group. Stokvels are relevant when they are put together in a manner that creates value. I

Recently I presented to a burial society, at the end, I was asked if I would consider joining? My response was that perhaps if the society was an investment club I would join. Coming together for the purpose of growing wealth seems preferable than for the purpose of making sure that I have a nice burial! Similarly, it would be nice to see investment products targeting the consumer who has largely not been part of the mainstream investment community rather than the funeral products that get flogged to this consumer over and over.

With the economy growing and at snail pace and environment of low returns predicted going forward, we are seeing an increasing desperation for higher and riskier investments, hence the recent explosion of “saving schemes” that purport to give returns in excess of 30% or pyramid schemes to be more direct. Next week, we will discuss these schemes further.