Mmamoletji Oniccah Thosago
The poor in South African usually reside in rural areas; however, urbanisation has also increased the number of poor urban and peri-urban citizens. In South Africa, the peri-urban poor tend to reside in either ‘townships’ or informal settlements. These townships were created by the former government regime; and generally received poor services and the little (if any) benefits from local economic development projects. iOut of the townships emerged informal settlements, areas that are often characterized by severely squalid standards of living, over crowdedness and dilapidated shacks. iiThese informal settlements are still prominent throughout the country, providing shelter for the poor and those who struggle to secure dignified housing, often in close proximity to places of formal employment and superior services.
When I first arrived in Johannesburg I was greeted by these makeshift shelters. The harsh reality of these settlements did not match my picture of the City of Gold. This discovery not only caught me off guard but sparked my curiosity into the living conditions of informal settlement households; ultimately leading me to conduct a study on the savings behaviour of the informal settlement households of Freedom Park in Soweto. Although various reasons have been identified for the urban poor’s difficulties with saving activities, (see Armstrong et al., 2008:18; Djebbari & Mayrand, 2011:10; Leibbrandt et al., 2010:9), there are no studies to date that focus on South African informal settlement savings behaviour.
The challenges of informal settlements
Informal settlements are not only exposed to a lack of basic and essential services such as electricity and sanitation, but because of their location, are also distant from formal markets, such as retail stores, formal public transport systems, and formal saving institutions. This lack of access has contributed to the formation of informal markets that mirror the services provided by formal service providers. For example, spaza shops sprung up to account for the non-existence of supermarkets in townships and informal settlements and provide residents with benefits such as extended shopping hours and flexible credit terms. Likewise, minibus taxi systems have evolved as the primary mode of public transport for most of South Africa’s citizens.
More recently, formal institutions and services have begun to emerge in townships, usually through mall-style retail spaces. This has included many financial sector institutions. In doing so, it was expected that the close proximity of banks would lead to an uptake of financial services from the unbanked population. However, the available evidence suggests that this has not occurred, and a number of regulatory barriers have been identified as rendering the use of formal institutions prohibitive for the poor.
Formal institutions are governed by international practices and domestic laws and regulations, such as the Financial Intelligence Act (FICA) 38 of 2001. It is difficult for the poor to comply with some of the legal requirements, which include requiring a potential bank account owner to deposit a minimum fee, as well as providing proof of residence and employment.iii Township residents in some instances are unable to provide a proof of residence because they do not live in formal or ‘legal’ dwellings.iv In addition, utility bills, which are often used as proof of residence, are difficult to obtain. The lack of formal employment also prevents informal settlement dwellers from being able to provide employment letters and salary statements, which are pre-requisites by Banks.v
Study
In order to assess the impact of this phenomenon, I observed the savings patterns and behaviours of residents of Freedom Park. Freedom Park was chosen as the sample area for this study because it has three informal settlements and is close to several peri-urban malls, including Maponya Mall, the largest retail mall in Soweto.
Findings
Poor informal settlement households of Freedom Park who cannot and are unable to save in formal financial institutions have established alternative semi-formal and informal savings instruments. Semi-formal savings instruments include burial societies and rotating savings and credit associations (ROSCAs) – the latter are referred to as stokvels in South Africa.vi
Unlike formal financial institutions, where access is generally based on set legal or economic requirements, these semi-formal saving instruments enable members of burial societies and stokvels to determine their own unique rules, terms and conditions, which are suitable to members’ socio-economic characteristics.vii viiiMoreover, because burial societies and stokvel members share a common bond, this enables these semi-formal instruments to be easily available to poor households. This common bond is usually defined by geographical location, ethnicity, work place fraternity, family, or friendship.
Of the 215 households surveyed, 150 households saved; with these households utilising multiple saving instruments. It is worth noting that some of these households used more than one saving instrument.
As evidenced in the table above, semi-formal instruments (i.e. burial societies and stokvels) are the most widely used form of saving. Burial societies and stokvels are community based, and it would therefore seem that these households mostly make use of community-based savings’ instruments to overcome being excluded or restricted from accessing formal financial institutions.
The emergence of formal financial institutions in peri-urban locations, offers distinct advantages that some semi-formal saving instruments lack. This includes, for example, a guaranteed inflation linked interest rate, that protects savers from nominal monetary losses. However, despite such advantages, this study shows that poor households continue using semi-formal and informal instruments. A brief summary of some of the key advantages and limitations of these different savings channels is provided below.
Recommendations
Residents of Freedom Park have developed community driven solutions to bring financial support and dignity to informal settlement dwellers. Additionally, these innovative instruments ensure that money flows within poor peri-urban areas. However, given the high level of use of these various instruments, particularly burial societies and stokvels, government intervention may be needed to ensure that these alternative saving instruments do not expose savers to monetary losses (in real terms) and other risks.
To ensure the long-term sustainability of semi-formal savings instruments and to protect users, the study recommends the following:
- To improve safety and mediate between savers, stokvels and burial societies could be registered with the Ombudsman for Banking Services (OBS) in South Africa. Stokvel and burial society savers who require some form of consumer protection could lodge a complaint against their respective stokvel and burial society and the OBS could undertake an independent investigation or attempt to mediate between members in connection with the reported matter.
- Stokvel and burial society members could be offered financial literacy workshops whereby these savers would be informed about the availability and use of different financial products, the importance of earning interest, and the need to create wealth in the long-term.
- Currently, South African banks offer accounts for stokvels and burial societies. However, this study has shown that the majority of the sampled households do not make use of these accounts, partly because these accounts do not accommodate the unique characteristics of stokvels and burial societies (e.g. unscheduled withdrawals). Customising bank accounts for stokvels and burial societies could encourage members to make use of formal banking institutions. In addition, members would be enabled to earn an interest on their savings. In this way, a cycle and culture of saving and investing could be fostered in poor communities.
References
i. Bonner, P.L. & Nieftogodien, N. 2012.Ekurhuleni: The Making of an Urban Region. Johannesburg: Wits University Press.
ii. Rogerson, C.M. & Mthombeni, T. 2015. From Slum Tourism to Slum Tourists: Township Resident Mobilities in South Africa.Nordic Journal of African Studies,24(3&4): 319–338
iii. Allen, F., Demirguc-Kunt, A., Klapper, L. and Pería, M.S.M., 2016. The foundations of financial inclusion: Understanding ownership and use of formal accounts.Journal of Financial Intermediation.
iv. Demirgüç-Kunt, A. and Klapper, L., 2013. Measuring financial inclusion: Explaining variation in use of financial services across and within countries.Brookings Papers on Economic Activity,2013(1): 279-340.
v. See note 4.
vi. Matuku, S. and Kaseke, E., 2014. The role of stokvels in improving people’s lives: The case in orange farm, Johannesburg, South Africa.Social Work,50(4): 504-515.
vii. Mashigo, P. 2007. Transforming the South African credit market through group lending mechanisms.Journal of Case Research in Business and Economics. 1(1): 1 – 16.
viii. Mutesasira, L., Sempangi, H., Hulme, D., Rutherford, S., & Wright, G.A.N. 1998.Use and impact of savings services among the poor in Uganda.MicroSave, Africa Research Report, Nairobi.