The International Day of Cooperatives was marked by the United Nations on 2nd July 2016. “I urge Governments to create an enabling environment for cooperatives to thrive and grow. Let us harness the power of cooperatives to achieve the SDGs and create a world of dignity and opportunity for all.” – Ban Ki Moon, United Nations Secretary General
Millions of Nigerians are not adequately served by the formal financial sector and remain largely unbanked; they continue to find mainstream financial services to be unaffordable, unresponsive and unfriendly. As this limits their opportunity to save, they are forced to rely on informal modes of saving and depend on credit unions, co-operatives and Rotating Savings and Credit Associations (“ROSCA”).
Such institutions have clearly demonstrated the ability of people to organize themselves at a basic level and come together to save and borrow to their mutual benefit. ROSCAs are the most commonly found financial institution in the developing world and have been in existence in many forms for hundreds of years. Indeed, in some rural areas, they are the sole savings and credit associations.
The “esusu” or “contribution club” is a traditional rotating savings and credit association that has flourished in West Africa for generations and is still widely practiced today. The incentive of participating in “esusu” is the forced savings that it encourages; putting aside money today to benefit from a lump sum payment in the future. Subscribing members contribute a fixed amount periodically. The accumulated funds are usually then assigned to each member of the group in rotation, until all have benefitted from the pool of funds. As a result, each member is able to access a larger sum of money during the life of the association, and use it for whatever purpose she or he wishes.
Access to Credit
Formal lending institutions attach stringent conditions to the granting of loans and informal moneylenders tend to be highly exploitative, offering exorbitant interest rates that put credit out of reach of the small borrower. Esusu, in a sense, allows individuals who may ordinarily not have access to credit markets a form of interest-free credit. Through the pooled contributions saved, albeit without interest earned, participants enjoy the possibility of gaining access to the accumulated sum long before the individual has saved up that full amount. Such lump sums make it possible for participants to acquire goods that they may otherwise not be able to afford, pay off debts or meet other pressing obligations. They can also take advantage of the occasional opportunity to improve their general welfare.
“Without contribution I don’t know where i would be today. It is impossible to get bulk money to pay rent, school fees or other necessities that my family needs. In my group there are 12 of us and we each contribute N20,000 a month. This means that once a year I get N240,000 and I don’t even have to pay back with interest. Where would I have seen such money! Thank God oh!” –Dayo, Bank Clerk
My husband just lost his job with the bank. They gave him just one month’s salary so we are really in trouble. Infact he is just sad as he doesn’t know how we will feed. My own turn is coming up in August and I will receive N100,000. I had planned to start a small business but its ok, at least I will be able to help with feeding the family for some time until he is up again.” Mercy Sossou – Petty Trader
“I tried for several months to get a bank loan. They asked me to provide land as collateral, which I do not have. I joined an Esusu group with ten members and we contribute N10,000 every month. This has really helped my business as when it was my turn last month I received N100,000. I would never have been able to save that amount to invest in my business. If someone runs away with all our money, we all know each other so I will just go to her house.” Alhaja Banjoko – Distributor
“I really struggled getting a loan from a bank as the collateral requirements were onerous. I joined my company’s Coorperative and Thrift society and it has been a Godsend. It is through this that I have acquired my first property.” Peter Johnson: Member Cooperative and Thrift Society
Based on Trust
This form of collaboration is totally founded on trust. Though naturally there will be instances where members of the groups have been duped of their contributions, even in societies where levels of trust on financial matters are questionable, esusu has proved to be popular and effective and continues to be so.
Time value of Money
The Esusu ignores the basic concept of the time value of money. The first recipients of the pooled funds are thus the main beneficiaries of the scheme, whilst subsequent collectors are essentially lending money to others interest-free; they also have to bear the additional risk of default from other members over time.
Although the Esusu has played a significant role in helping people cultivate a savings habit, more formal investment clubs have been in existence for decades, and are a more effective way of achieving the saving and investment goals of members. They offer their members a means to grow their personal wealth and learn about investing at the same time. Members of an investment club make subscriptions and invest the pool of funds as an entity in a variety of instruments including mutual funds, stocks, and real estate.
Compensation is expected in the form of interest and dividend payments as well as appreciation in the value of the underlying investments. With the significant hub of economic activity in the informal sector, the onus is on the micro-finance banks and other mainstream financial sector participants to develop appropriate products and services to target this sector. These informal credit institutions should, through registration and regulatory guidelines, be gradually integrated into the formal financial community to protect members. Until this happens, they will continue to thrive unregulated.
Nimi Akinkugbe has extensive experience in private wealth management. She seeks to empower people regarding their finances and offers frank, practical insights to create a greater awareness and understanding of personal finance.