Chama 2.0

Posted 3 months, 3 weeks ago | Originally written on 5 May 2012

Banks are private institutions that determine how national economies develop. They are largely private. The result is that private holdings determine national outcomes. Since banks set interest rates and effectively determine the availability of usable capital they throttle production and prevent the realisation of ideas. At any single point in time the amount of money in circulation is a tiny (way under 10%) percentage of what is claimed to be held and the immediate consequence is that individuals and small businesses have to work incredibly hard to own a part of what is available. Most of the rest of their money is stored away in the bank but only exists as bank records and work in the banks' interest (literally).

The cooperative movement is a means to have individuals have access to money that they would not usually have at friendly interest rates. The remarkable thing about cooperatives is that they are based on members savings (called shares) that make profit due to the members' use of the money later paid back with interest. As the members use this resource they can increase their productivity and that which they pay back out of their productivity eventually comes back to them. For coops to operate effectively there are very clear regulations that they are governed by. Most of them are based on members' commonalities (e.g. working in the same company or industry) from which they derive greater communal benefits. Moreover, governments will usually have an office set up to tend and regulate the development of the cooperative movement.

A far simpler solution are what are colloquially referred to as 'chamas' (anglicised plural of Swahili word meaning 'party' or more loosely refers to any such 'group'). Members pool money, usually on a monthly basis, giving it to each member in a round robin. So, if a chama had twelve members and each member contributes Kes.1000 per month, they will collect Kes.12,000 in the first month. They can then structure a way in which each of the members will have a go at the Kes.12,000 in turn. By the end of the year, each member will have had access to a lump-sum amount at once while saving consistently throughout the year. Of course, this can be a bit painful for the last person to receive their share turn in the round!

There are two main problems with chamas. One, even though the members will each have access to the money at their respective slots in the round robin they only have once shot at it. Once their shot is passed there is little they can do but wait. This can easily be solved by saving up the money they get at their slot for that rainy day but in this case no benefit is then gained by being in the chama since one could just have well done so alone (you do not need friends to save). In this way, the chama does not solve the problem of opportunity. The second problem is that the members do not obtain any gains on their money. Without any gains they simply lose to inflation and since chamas are most useful in developing countries where inflation rates are most hurtful the effects are most severe. Without the ability to make gains on savings one is much better off investing in other avenues. 

Before I address the alternative it is worthwhile to take a short detour to make known my position on investment. I think that investment guided by the need to maximise on investment is a greed trap and is the basis of much needless speculation. The obvious consequence is exactly what banks-as-we-known-them do. Majority of banks are foreign and have external interests. Any gains they make are generally not in the interest of the region they operate in and this is more the case in the developing world. Most banks are either English- of American-incorporated and they only serve the interests of a few English and American individuals, not even their national interests. In short, the primary goal of investment should be social and not financial. If financial interest are put before social interests then we are left with a socially-unresponsive and irresponsible system that primary hoards resources away from those who need it for social purposes e.g. schooling children, seeking medical attention, caring for the environment etc. Therefore, taming one's greed when investing is socially beneficial but it takes society as a whole working with one mind.

Chamas can be improved by taking advantage of what is known about cooperative structures and practices on a small scale (in a small group of friends) to everyone's benefit. First, money should be held in local banks or local microfinance institutions and not in large banks that promise measly interest rates. It is far better to avail funds for fellow citizens than foreign private interests that have no inkling on local needs. Clear records should be kept on each member's contribution. Members should be at liberty to make contributions of whatever amount that they can comfortably afford. It would be wise if the number of members were restricted to between five and ten members: five because any disputes will likely have sufficient witnesses to testify and ten because the members can easily use their innate memory to remember key events (e.g. who was present at the monthly meeting). Second, members should elect one or two members in good standing, on a rotating basis, to serve as officials to keep records on the chamas activities. Undoubtedly, most chamas already do this. Third, members should make applications for whatever amount of money they need and allocation should be made on a priority basis. For example, suppose they group has saved Kes.12,000 and three members have applied for the money in the following order: member1 needs Kes.7000; member2 needs Kes.4000 and member3 needs Kes.2000. This is a total loan application of Kes.13,000, more than is currently available. Member1 should get his request unreservedly, as should member2 and member3 may then postpone his request until a further month or accept what is left. It may turn out that either member1 or member2 may decrease their request to accommodate member3; that is entirely up to them as far as the priority rule holds. Ultimately, members should be at liberty to decide how to meet each other's needs. After all, what are friends for?

One new thing that the members can introduce is an interest charge. Here members can be creative but should not be greedily punitive. For example, members can agree that they will charge 1% for each month in which an outstanding amount is due. Remember, the members are still making monthly payments. Those who have borrowed money are additionally required to pay back what they owe. Suppose member1 gets the Kes.7000 as previously indicated and agrees to pay it back in three monthly instalments. After the first month his loan will have grown by 1% to Kes.7070. If he pays back Kes.3000 he will have Kes.4070 outstanding on which future interest will be calculated. At the end of the second month the outstanding balance will be Kes.4110.70 (Kes.4070 + Kes.40.70) and after a payment of Kes.3000 will now owe Kes.1110.70. After the third and final month he will be required to pay back the remaining Kes.1121.807 (I had to use a calculator!). In total he will have paid back Kes.7121.807. The group will have gained Kes.121.807 and in a group of ten members this translates to a Kes.12.1807-gain per person (including the borrower!). We can then calculate the effective interest rate each member will have made from their investment. If one takes into account all the money that can be borrowed by the members in the course of a year together with the fact that they are actually saving then it turns out to be a much better investment than storing the money in a foreign commercial bank that will have lost value due to fees but make millions to its private owners. Add to this the the fact that the members have made productive use of their money and you have a strong instrument to develop the individuals' lives without the messy hassle of bank loan applications. One key point to note is that if a member is able to pay back the whole loan plus interest after the first month without sacrificing their ability to make a monthly contribution it will certainly be to their benefit and the chama as a whole. More money will be available for further loans to other members.

Perhaps the outstanding question to be addressed is how to deal with defaults; that is, members failing to honour their agreement to pay up. Cooperatives have a good way of handling that: guarantors. The full amount of each loan application is guaranteed by fellow members. In our previous example, member1 will need to get some of the members to guarantee the loan such that if he defaults they will be required to pay it back with the interest accrued. It is certainly in members' interest to be in good standing if for nothing else but to maintain a peaceful atmosphere with their friends.

This is just a rough sketch of what can be accomplished if people can take back control of their finances in a prudent manner. Greed drives investors to predictably overlook the social implications of their pursuits and makes them all the more poorer in spirit. A thriving community is one in which members make fitting use of available resources for the society's benefit as a whole. Once members have secured each other's financial trust they can begin to experiment with other ideas such as means to reward frequent borrowers to encourage further borrowing. Member may also choose to penalise defaulters by, for example, depriving them of interest for the months defaulted. Members can thus develop a register to record their credit scores that may be later used to reward members who faithfully pay back their loans. Regardless of what members decide they must keep it simple and understandable for all; too complex structures will compete with banks for dishonesty. The goal should end up being to help members make the most use of whatever financial resources they have to have a safe and practical system for savings and investment. Ultimately, the net effect will be that more money will be put to useful work and improve the lives of the those it touches. Let us never forget that money is but a social tool and that our desire for more of it should never lead it to master us, its maker.