Accelerating financial inclusion in South Africa: Are online stokvels the answer?
Why are stokvels so popular?
According to the World Bank, financial inclusion refers to a population’s access to useful and affordable financial services. Financial inclusion enables people to transfer funds, build up and manage savings, access loans or credit, and acquire insurance cover – irrespective of their socioeconomic status, income level or geographical location. A low level of financial inclusion in a country (which is often the result of limited financial knowledge) exacerbates poverty and is an impediment to growth and job creation. It also fuels a shadow economy in which many economic activities go unrecorded.
In South Africa, about 70% of the population is considered financially included, using the basic measure of whether or not they have a bank account, although less than 30% of formal bank accounts are classified as active. Yet the concept of financial inclusion extends well beyond traditional banking facilities. A large number of people in South Africa make use of stokvels as an alternative to formal financial services. A stokvel is a group of people who make contributions at fixed intervals (usually monthly) to a common fund for an agreed period. The contributions are then distributed to each member according to an agreed rotation schedule ‒ sometimes with interest, depending on how the money is invested. Some stokvels also extend micro loans to their members and/or non-members at a specific rate of interest.
A low level of financial inclusion in a country … exacerbates poverty and is an impediment to growth and job creation.
A stokvel is South Africa’s equivalent of what is known internationally as a Rotating Savings and Credit Association (ROSCA) or an Accumulating Savings and Credit Association (ASCA). There are subtle differences between ROSCAs and ASCAs (the lending rules of the latter are more flexible) but in South Africa the activities of these two types of association are both catered for by a stokvel. People join stokvels to cover short-term expenditure requirements (such as groceries, household appliances, school fees, weddings, burials and business start-ups) or to put money away for saving or investment purposes. The National Stokvel Association of South Africa (NASASA) has 810,000 registered stokvel groups, covering a total of 11.5 million members. Clearly, stokvels have an important role to play in mobilising and managing funds. Given South Africa’s well-established banking industry, why have stokvels become popular?
Banks are often perceived to have high fees, too much paperwork and slow response times. As a result, many people do not trust banks or they find them inaccessible, preferring to conduct business informally. A stokvel has a trust-based business model, giving many people peace of mind when it comes to saving and accessing funds because they are part of an established community with known credentials. Each participant feels socially pressured to honour their commitments and remain accountable. Although most stokvels have bank accounts, they generally do not regard these as useful savings vehicles. Compared with banks, stokvels have easier terms and lower transaction costs.
Banks are often perceived to have high fees, too much paperwork and slow response times. As a result, many people do not trust banks or they find them inaccessible, preferring to conduct business informally.
Those in low-income households depend on stokvels for credit or micro loans because often they do not qualify for such facilities from formal financial institutions like banks whose credit application criteria are comparatively onerous. Such criteria typically include having an identity document, proof of residence, permanent or fixed-term employment, a minimum basic salary and a bank account. Stokvels, on the other hand, do not require proof of an applicant’s residence, income or credit history. They often base their decision about someone’s eligibility for credit or a loan on trust, either directly or through a stokvel member who vouches for the applicant. Besides constituting a convenient financing or savings vehicle, stokvels can be a source of moral support and group identity, especially for women who are particularly vulnerable in poor communities.
Can online stokvels help to accelerate financial inclusion in South Africa?
Advances in fintech (financial technology) – notably online banking ‒ have brought many benefits to the banking industry in recent years, including lower costs, increased security, heightened speed and business agility, an expanded customer base, and greater autonomy and privacy for clients. In addition, fintech helps to link rural and other excluded communities to financial services where geographical remoteness would otherwise be a barrier. One should ask: Could the use of technology in the stokvel system deliver similar benefits? Do stokvels lend themselves to an online format?
Fintech helps to link rural and other excluded communities to financial services where geographical remoteness would otherwise be a barrier.
Internationally, there are a number of ROSCAs and ASCAs that operate online, such as Puddle (used in the US) and Winkomun (used in Spain, Italy, Indonesia and Venezuela). Online stokvels are slowly gaining traction in South Africa as well. For example, the mobile app StokFella offers deposit and payment-tracking facilities, while the CFB3 app enables stokvels to interact with and fund start-ups in return for profit sharing. Naturally, these apps require users to have smartphones. A 2018 study revealed that smartphone penetration in sub-Saharan Africa stood at only 33% ‒ the lowest rate of all major world regions. Even South Africa had a less-than-stellar penetration rate of 51%. However, as mobile devices and applications multiply, and as regulatory reforms are introduced, smartphone penetration rates in Africa are predicted to rise steeply over the next few years.
Several studies have revealed how technology has broadened the scope of financial services, making transactions easier and less expensive, and helping to fuel e-commerce. However, little research has been conducted on how the use of technology (particularly mobile telephony) can enhance stokvels’ efficiency and effectiveness. The study on which this article is based set out to investigate ‒ through a literature review followed by an empirical study ‒ the viability of hosting stokvels online and whether these are likely to improve financial inclusion in South Africa.
The growth of mobile money services in Africa (such as M-Pesa) is an excellent example of how fintech has helped to boost financial inclusion among previously unbanked or under-banked people. Likewise, online stokvels have the potential to forge greater financial inclusion by dissolving the traditional geographical and administrative constraints to expanded membership and efficient service delivery.
However, the success of such an online system is heavily dependent on mobile phone ownership as well as accessible and affordable internet connectivity. Furthermore, a country’s regulatory environment should balance the need for state control with the need for innovation and fair competition. It should not stifle creativity or demand. Importantly, too, introducing online alternatives to conventional stokvel systems requires more than digital hardware and software; it calls for psychological acceptance by stokvel members and borrowers.
Internal drivers of technology adoption
According to Davis’ Theory of Technology Acceptance Model (TAM), a consumer’s decision to use a certain type of technology is influenced by its perceived usefulness (PU) and its perceived ease of use (PEOU). A weakness of this theory is that it has a workplace focus only and disregards social or cultural factors impacting technology adoption. Another study points to the adoption of technology-enabled financial services in South Africa being influenced by five variables: self-efficacy (relating to people’s perceptions and personal beliefs), task-related (what is involved in achieving an intended outcome); hedonistic (the fun in performing a task), social (how individuals perceive themselves and are perceived in a social context), and trust (people’s uncertainty about or perceived risk in performing a task).
Besides constituting a convenient financing or savings vehicle, stokvels can be a source of moral support and group identity, especially for women who are particularly vulnerable in poor communities.
Trust is a particularly important construct in the financial services domain and a key factor influencing people’s decision to use a financial institution or technology. Attitude, in turn, informs people’s perceptions of the benefits of the technology in question. Understanding consumers’ perceptions of technology and what influences their usage thereof can go a long way towards ensuring that financial service offerings are useful and consumer-friendly.
Key findings from the empirical study
The empirical study probed a sample group’s impressions of and/or personal experiences with offline and online stokvels. The participant sample comprised five subgroups: 10 offline Stokvel members, 2 online stokvel members, 3 stokvel borrowers, 5 owners of online platforms, and 42 people who had had no experience of stokvels. Information was collected in face-to-face and telephonic interviews.
The collective findings are summarised as follows.
- Views of offline stokvel members. With a couple of exceptions, most participants in this subgroup reported a similar approach to the management of their stokvels – i.e. each member contributed monthly (usually R1000), one of the members acted as the fund administrator, and loans were provided to clients (charging interest of 15% to 20%). When asked whether they were receptive to the idea of converting to an online stokvel, they gave mixed responses. Some could see the merit of going online because it would simplify administration, but they stressed that it would need to be affordable and accessible and also guarantee members’ privacy. Others likened online stokvels to pyramid schemes and said they could not be trusted. Also, the formalisation of stokvels could be off-putting to some of their less digitally savvy clients who preferred personal contact in their financial dealings.
- Views of online stokvel members. The members of the online stokvels were geographically dispersed, which was a factor in their decision to go online. Both stokvels reported that online hosting of their stokvel had brought greater transparency, reduced the administrative burden, facilitated growth in membership (because geographical location did not present a barrier) and simplified financial management through a single group bank account. However, one of the stokvels named high transaction fees as a drawback.
- Views of stokvel borrowers. The participants in this subgroup indicated that stokvels were a valuable source of funds because of their simple loan criteria and the fact that money was immediately available. However, while two participants were quite receptive to the idea of their stokvel moving online, the other participant believed that online stokvels were no better than Ponzi schemes, designed to relieve people of their savings in an unscrupulous fashion.
- Views of online platform owners. Among the online stokvel platform owners interviewed were StokFella, Yethu and Participants in this subgroup reported that the benefits of having a stokvel hosted by an online platform include greater transparency and transactional security for members, a lower administrative burden and a favourable savings/investment environment. Challenges include people’s suspicions about online stokvels and the low level of technology adoption in some communities due to connectivity problems, the high cost of data and a lack of digital knowledge.
- Views of non-stokvel members or users. 67% of this subgroup said that they would join a stokvel and 62% said that they would join an online stokvel.
The benefits of having a stokvel hosted by an online platform include greater transparency and transactional security for members, a lower administrative burden and a favourable savings/investment environment.
The way ahead
Online stokvels clearly have potential in South Africa, judging from the study’s findings. Strong and compelling marketing campaigns by online platform owners, underpinned by a thorough knowledge of the market they are serving, will go a long way towards building trust in the online stokvel model. However, many people’s exclusion from the digital economy will, if not addressed, be a stumbling block to the expansion of this sector. Priority should be given to addressing inadequate (and expensive) connectivity in various parts of the country and creating opportunities for poor people to confidently access stokvel services online as a stepping stone towards greater financial inclusion.
- This article is based on the MPhil in Development Finance research assignment of USB alumnus Nobantu Mkhwanazi. The title of her assignment is “Online Stokvels for Financial Inclusion in South Africa: Adoption and Challenges”.
- Her study leader was Dr Nthabiseng Moleko, Senior Lecturer in Managerial Economics and Statistics at USB.