- February 19, 2019
An old African tradition of saving is re-emerging in the region, known by many names (min - Haiti, partner - Jamaica, meeting turn - Barbados, esu/asou - The Bahamas) to help small business owners obtain the funding for their ventures. However, even though these types of money pools are beneficial to the low income communities of small business owners using this method, it can result in significant exposure to fraud or scams.
Origins of Rotational Saving Clubs
Rotational savings clubs may be one of the earliest forms of savings (a combination of peer-to-peer lending and peer-to-peer banking) in Africa. Known as a “sou sou”, this informal savings club consists of a small group of people with each member contributing an agreed amount of money to the fund over a specific period. At a certain time, each member will be given a turn to receive a lump sum. For example, ten members depositing $50 per week for three months would be eligible to receive $600 each. The key to the process is for each member to continue to make their deposits to ensure that the fund is kept alive.
Benefits to Small Business Owners
Small business owners are seen as high risk borrowers due to several factors. These include a lack of consistent cash flow, insufficient collateral and debt to income ratios (if a business owner has other debts with other financial companies) all of which can present challenges for lenders. Alternatively, with a rotating savings club, there is no interest and nascent business owners (as long as they maintain their payments) are guaranteed a fixed injection of funds. There is no paperwork and it provides opportunities to increase your investment without transaction or processing fees.
It’s Risky and No Regulations
Small business owners who get involved in rotating savings clubs are exposing themselves to considerable risk. The agreement within the group may not be formalized with documentation, members may not know a lot about the financial situation of those in the business arrangement and there is a question of trust - will you as co-investor receive the money promised to you? From a legal standpoint, there are no laws to regulate these types of transactions and the only way it may become of interest to the authorities is if the treasurer uses a bank to deposit the funds. Today, persons can set up “sou sous” much easier with the use of online currency and mobile apps which means the business owner does not even have to be in the same country as the other members. This can make incidences of fraud or a scam difficult to investigate.