South Africa does not lack for banks. As Zakhele Mthembu, a regular contributor to the Freemarket Foundation and to the Rational Standard has persuasively argued, the popular stokvel model of one member receiving a payout each month, has all the features of a bank.
This model is common in South Africa, having morphed into the sometimes brilliant, sometimes horrible, WhatsApp stokvels.
Individuals effectively make monthly deposits which are lent out to the other members until that individual is paid back in a few months.
There's a variation on this model in which interest is introduced. This allows members who don’t borrow as much (savers) to earn an income from the stokvel.
In these stokvels, members also contribute monthly, but the contributions are only similar in the beginning.
Based on the amount of debt they have taken on, some members will also be liable for interest and therefore higher monthly payments.
In the meantime, some members receive monthly payments if they're net creditors, while those who are net debtors are liable for these payments.
Of course, some of these have problems but some are relatively successful.
It is interesting to observe that where friction arises, it is usually the net debtors complaining about the healthy payments some of the net creditors, or savers, are receiving.
This is a common thread throughout South Africa's banking industry: the pensioners groan while the indebted cheer with every interest rate cut.
But nevertheless, some stokvels have individuals mature enough to pursue a common interest, based on the integrity of the people involved and no enforcement of the contract by government.
These people are the ones most likely to benefit if stokvels can access traditional capital markets.
It is insanity that if you are a pensioner living in a township it is unlikely that any of your savings are invested in the same township.
Something is broken. We have a proliferation of small banks with various innovative business models targeting their markets, including mashonisas, yet this flurry of activity seemingly cannot be scaled up to the point where it starts having a meaningful impact in the communities that the savers of this country have to live in.
This is not advocating for some ill-advised regulation prescribing that pension funds invest in townships, as that would be an unmitigated disaster with people who ought not be investing in a market they don’t understand will be doing so for the sake of compliance.
This will have disastrous consequences and a negative reputation for township investment.
What is required is unleashing the entrepreneurial forces already operating in the townships.
It is of no use to fight the people, so government has to get out of the way.
Indeed, stokvels are being used to finance property acquisitions but there are problems of trust in large groups.
Without the use and enforcement of contracts, it is unlikely to grow beyond a certain limit.
Everywhere you look, South Africans are striving to make a better future for themselves and their families.
Stokvels are naturally risk-averse if their members are allowed to control them – in other words if the contract can be enforced.
The problem with calling stokvels "banks", is that of course, the Banking Act, the Mutual Banking Act and the Cooperative Banking Act, collectively claim a legal monopoly on defining what is and is not a bank.
We are told about Basel compliance regulations, millions in capital, stringent information requirements, yet no member of a stokvel or any mashonisa has to worry about these.
Yet these institutions fulfil the requirements of deposit taking, lending institutions, namely banks.
The path to the growth of these institutions lies in removing the regulations that make what they do illegal at large scale.
Any attempted formalisation through imposing regulations on the sector is a non-starter.
Government has to realise that it has two fundamental choices.
First, to continue to try and impose a theory of how an economy is supposed to work on South Africans, and therefore continue to see living standards decline and unemployment and poverty grow.
Second, government can follow the people, and allow the people to lead.
This requires changing the legislation to stop the perversion of law in which the people are criminalised for peaceful acts.
Some stokvel members commit crimes such as fraud, theft or robbery, but these crimes are not unique to stokvels.
The focus should be on protecting private property and therefore dealing with the criminals through the normal justice system.
The degree to which the individual rights of stokvel members are protected, is the degree to which these institutions can attract investment into their communities.
Formal economic institutions need to be able to conclude legally binding contracts and not violate government regulations and legislation.
On the other hand, for these institutions to grow without significant external investment, it will require them being capacitated to acquire goods and services from other parts of the economy to fuel that growth.
Our politics has created an expectation of something for nothing. Everyone wants growth but no one wants to sacrifice for it.
In addition, the savers are envied and robbed seemingly at every opportunity.
That is not all. Government criminalises its poorest citizens for choosing banks that make sense for them and their needs.
This injustice needs to end, and the economic freedom of all South Africans must be recognised and protected. This article was first published on City Press on 9 July 2020
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