The Regulatory Framework Governing Stokvels in South Africa

Introduction

In South Africa, although stokvels may be overlooked, they generate approximately R50 billion annually. Roughly 40 percent of the population, that is about 11 million people, rely on stokvels to cushion themselves from poverty and financial exclusion.  Stokvels are financial clubs that function as saving schemes or credit associations, that are commonly run by the economically marginalized people and low-income earners as an attempt at cushioning poverty as well as to curb financial exclusion. Overall, the regulatory framework that governs stokvels in South Africa is limited and underdeveloped. This essay provides a holistic definition to stokvels, discusses the shortcomings and strengths of the regulatory framework governing stokvels in South Africa, provides suggestions on how the regulatory framework governing stokvels can be improved, and provides concluding remarks. 

A Holistic definition of stokvels

A stokvel is a saving or investment scheme in which the members agree on an amount that each member must contribute regularly, and later the funds are distributed to the contributing members equitably and rotationally.  Although this definition expresses the certain behaviors and characteristics of stokvels, it is narrow since not all stokvels distribute their funds amongst members; some stokvels invest the funds for the benefit of the members instead. They are known as rotating savings and credit associations globally, formed by individuals who come to an agreement to save collectively. They may also be described as informal groupings where people who posses the same vision conclude an agreement to contribute a fixed monetary amount into the scheme either weekly or monthly. However, the definitions above exclude formal stokvels and do not adequately capture the depth and complexity of stokvels.

 Thus, a more fitting definition is found in section 1 of the National Credit Act, which describes stokvels as formal or informal rotating financial schemes made up of two or more people who, in a voluntary association, pledge to provide mutual support to each other and towards accomplishment of their joint objectives, establishes contributions on a weekly or monthly basis, provides credit to and on behalf of its members, provides for members to share in profits, and relies on self-imposed regulations to protect the interests of its members.

Basically, a stokvel is an association owned, managed, and operated by its own members, whose general purpose is to serve as a saving tool normally formed between friends, members of the community who share a common financial goal.  In the 1900s stokvels were savings based, however, nowadays the most common types of stokvels include grocery stokvels which are common towards the end of the year, funeral stokvels, and investment stokvels, amongst others. 

The shortcomings and strengths of the regulatory framework governing stokvels in South Africa

In South Africa, initially, there was not any legislative framework dedicated at governing stokvels. Until in 2014 when the Banks Act put requirements in place for stokvels to be registered and to operate under the self-regulatory framework of the National Stokvel Association of South Africa (NASASA), which is authorised by the Reserve Bank.

Shortcomings of the regulatory framework governing stokvels in South Africa

Stokvels in South Africa do not possess legal personality, they are often viewed as partnerships under the South African Law. As a result, they are limited from entering contracts, securing insurance, and/or accessing investments. Recent studies reveal that the majority of stokvels are not registered with the National Stokvel Association of South Africa, meaning that the unregistered stokvels operate outside the exemptions of the Banks Act and the National Credit Act. This indicates that the regulatory framework established by the exemption notices of the Banks Act granted to stokvels through the NASASA from the Treasury and the South African Reserve Bank is unfit.  Members of unregistered stokvels point out mistrust and lack of knowledge about the NASASA, with a significant number of them also stating that they do not want the government to intervene because they are of the belief that the government always hijacks and spoils things. 

Since the provisions of the National credit Act and the Banks Act exempted stokvels from their provisions, stokvels enjoy the liberty of taking advantage of the poor people who rely on credit, charging them exorbitant charges and leading them into over-indebtedness.  The lack of fit regulation exposes stokvels to risks such as fraud, and operating outside the formal regulatory framework makes it challenging for stokvels to obtain support and resources needed to grow their business. 

Strengths of the regulatory framework governing stokvels

NASASA, which is the regulatory framework authorised by the Reserve bank to regulate stokvels, as mentioned above, was created to not only protect but also to benefit stokvels in terms of the exemption notices of the Bank act. It was also formed with the object to create opportunities, and it also has a magazine, used as a tool to educate the public about stokvels. And the NASASA partners with the Financial Sector Conduct Authority (FSCA) to regulate and supervise market conduct, as well as to maintain financial stability. Additionally, stokvels are exempt from the National Credit Act’s stringent regulations, this affords stokvels the autonomy to regulate their internal affairs.Thus, credit agreements within the stokvel structure are not subject to the scrutiny of the National Credit Act, this means that they need not register with the National Credit Regulator.  Stokvels remain a cornerstone for the household economy because the banking sector does not interfere with them.

The exemptions under Banks Act provides that stokvels need not acquire a banking licence to take deposits from the public. Furthermore, they need not be registered as credit providers since credit transactions between a stokvel and its members in line with the rules of such stokvel, are not subject to the National Credit Act. This allows stokvels the flexibility to distribute and collect funds without abiding by strict requirements of banking registration and thus preserves the accessibility of the to the groups of people who cannot access formal banks.  Additionally, there is a continuous relationship between the lenders and borrowers within a stokvel that indicates trustworthiness and eliminates the challenge of having to provide collateral to formal financial credit providers. The statute law that deals with stokvels serves largely to exempt them from the financial regulatory system. This lack of regulation creates space for the small entities to act as banks to the informal economy and provide capital to those in need. The Financial Intelligence Centre Act is also dedicated at alleviating illegal activities such as money laundering within the stokvels. Overall, operating within the regulatory framework does not only provide stokvels with flexibility and liberty to flourish in the market, but also legal protection through law enforcement, instead of relying on social ties to enforce contracts. 

Improving the regulation of Stokvels in South Africa based on a comparative perspective with the jurisdictions of Kenya and Tanzania          

South Africa can enhance its regulation of stokvels by drawing lessons from the jurisdictions of Kenya, Tanzania, and Uganda, where small savings groups similar to stokvels thrive under regulations. 

In Kenya, they have village banking groups known as savings co-operatives. These savings co-operatives mirror stokvels as community saving groups and are regulated by the SACCO Society Act 14 of 2008. The Act provides for regulation, supervision, licensing, and promotion of the saving co-operatives. It also established the SACCO Societies Regulatory Authority, which oversees operations of the village banking groups. South Africa could benefit from adopting a similar approach and establish an Act dedicated entirely to stokvels, with the aim to integrate stokvels into the mainstream financial ecosystem, that would help alleviate poverty and unemployment, for instance the Act could also offer incentives to groups who register their stokvels. 

Kenya also employs digital platforms such as M-PESA to migrate the savings and credit groups into the formal banking system for the benefit of rural and low-income population, and to eliminate their inability to access formal financial services. This approach of employing digital platforms could help combat cybersecurity fraud and create convenience for rural populations who live far from financial institutions in South Africa. 

In Tanzania, the savings groups are regulated by the National Microfinance Policy, 2017. This policy provides for supervision of the saving groups under a tiered system, which makes it easier and clear for the saving groups to move from one tier to the next and ensures civilized transactions between lenders and borrowers. In South Africa there is a lacking balance between the regulatory oversight and the autonomy of the members of a stokvel,  thus drawing lessons from the regulatory framework of Tanzania could help mitigate the issue and prevent stokvels from losing their identity and moving away from the reason they were formed. South Africa could also take lessons from Uganda’s tier 4 Microfinance Institutions Act which offer voluntary registration while preserving the informal nature of savings groups. Adopting a tiered regulatory framework would facilitate for the different treatment of saving groups, according to their sizes and status, ensure that the administrative burden is proportional to the group, and safeguards depositors while preserving the self-managed nature of the stokvel. 

Conclusion

It is quite clear that stokvels are not limited to being informal savings groups but also have the potential to develop the economy of South Africa. Stokvels are not regulated by a single regulatory framework, but by a combination of exemptions, self-regulation and compliance laws. While the lack of a strong regulatory framework may put stokvels at risk of fraud and financial mismanagement, which may eventually cause reduction in participation; excessive oversight on the other hand, may impose administrative burdens on stokvels and that also would potentially reduce participation. Thus, there must be a balance between the regulatory framework and the flexibility of stokvels to ensure success in the improvement of stokvels which in turn will successfully develop the economy and curb poverty and unemployment. 

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