The linkages between informal savings and credit mechanisms (stokvels) and commercial banks.

Abstract

In low-income countries such as those found in Africa the financial sector is often divided into two parts; the formal and informal sector. Previously the latter was believed to cater for that segment of the population whose financial status did not allow them to participate in the formal financial sector. However as this study and other studies indicate, this is not entirely true. In South Africa particularly, informal financial mechanisms such as stokvels prevail alongside more formal financial institutions. This study’s aims were to investigate the reasons why stokvels prevail as a credit and savings mechanism despite access to commercial financial services. In addition, to trying to understand the benefits derived from stokvel participation, this study aimed to uncover the inter-linkages between the commercial banking sector and informal savings schemes, and the constraints that limit greater participation in formal savings schemes. Open-ended in-depth interviews were used to gather data from 15 participants, both females and males in stokvel groups. The interviews were transcribed and the study objectives were taken as guiding themes. The study was conducted in KwaXimba, a rural village in the Valley of Thousand hills, Cato Ridge, Durban. The study found that there are interactions between stokvel groups and commercial banks in the form of monetary flow. According to these findings, the dominant inter-linkages between stokvels and commercial banks occur in the form of savings mobilization, in which stokvel groups save their funds with commercial banks for a period of time (usually a year). In addition, this study reveals that linkages in the form of credit flow are non-existent; as none of the participants reported having received a loan from a bank or seeking a bank loan. Therefore, the direction of linkages is one-sided from a less formal to a more formal financial institution. With regard to the benefits of belonging to a stokvel group, participants cited various benefits some of which confirmed what is already known. The two most cited benefits were forced/collective saving and socializing/companionship. The less prominent benefits of stokvels included high returns on loans and the absence of bank charges. The study found that one of the two most cited constraints to adopting formal financial mechanisms was unemployment. The second most cited constraint was participants themselves, five participants in this sample argued they did not see the need for a bank account because they were either unemployed or preferred stokvels.